Trading losses are an inevitable aspect in the world of trading and investment. Almost every trader will encounter a trading loss that will impact his trading attitude and find it hard to bounce back after. Except for the most experienced and successful trader, they control their mental perception of such situations. It requires experience and a solid trading mindset to contain your emotions, learn from mistakes and never let any of them drive the next trading decisions.
Tips to Handle Trading Losses
Accept Responsibility: Own your losses and admit when you make a wrong decision. It is healthy to stay honest with yourself so that you can avoid repeating losses and mistakes.
Take a Break: After trading losses, you are more likely to make irrational trading decisions if you are overwhelmed and stressed. It is ideal to take a break when you feel that the market is against you. Take some time off trading and review your trading activity. Start by sorting out the weaknesses and mistakes to work on them.
Analyze your Loss: Successful forex traders are always concerned with performance analysis. Not only good trades, trading losses should be analyzed as well. When you do this, you can figure out the weakness points to work on and wrong decisions to avoid later.
Assess your Exit Strategy: When you struggle with a severe trading loss, it’s better to reassess your exit strategy. If you hold on losing trades for long, then you should focus on cutting your losses early.
Keep a Trading Journal: Keeping a detailed trading journal will help you identify what needs to be improved and what you should stick to. A trading diary should include trade details including size, entry and exit points in addition to targets and risks. Writing down your decisions and emotions will also be more helpful. The more detailed a journal is, the more insightful it is.
Avoid Revenge Trading: Feeling frustrated after incurring trading losses is inevitable no matter how experienced a trader is. This feeling may push the trader to make irrational decisions leading to bigger losses. Revenge trading exists, and you have to be aware of it, work on it and contain it. Never let your feelings of anger and frustration take control of your decisions. It may be hard at first, but with experience you should have better command of that.
Move On: After reviewing your performance, analyzing your losses and accepting your mistakes it’s time to move on from this loss and prepare for what’s next. Get back in the game and regain confidence.
Turn Your Trading Losses Into Success
Trade with a Plan
The trading plan is a comprehensive and strategic approach to follow based on goals, trading strategy and risk level. It is a decision-making method for a trader that helps in deciding what to trade, when to trade and determining the size of a trade. It is simply a designed framework that guides the entire trading process. It is usually personalized to suit individual trading objectives. There is no absolute plan to be followed, however, there are different aspects to consider when developing a plan. These aspects include the trading goals, risk tolerance, investment capital, psychology, the motivation for trading, trading tools and risk management rules.
Developing a plan to serve as a guiding framework is very crucial to achieve consistent profitability in trading. It is pretty much like a road map that keeps you on track to your trading goals. A good plan will help you in taking rational trading decisions, by sticking to its rules. Benefits of a having a plan also include:
- Discipline: having a plan with a predefined set of rules will help you maintain discipline in trading by sticking to these rules, and keeping you from letting emotions control your trading decisions.
- Trading with ease: by sticking to a plan, you won’t feel stressed as you know what should be done. A clear and precise plan lays out all the needed criteria that must be met before making a trading decision.
- Performance improvement: keeping a journal of your trading activity is a key component of a successful plan. It helps in assessing the performance of your strategy, thus improving the weakness points to enhance your trading performance.
- Objective decision making: since trading success is basically based on taking the right decisions, having a plan can help in making objective trading decisions, that will give you more confidence with less emotional engagement.
Follow Risk Management Rules
Forex risk management plan is a set of rules that help mitigate the impact of any risks that could threaten a trade. Risks are the potential threats that may cause losing money in forex trading. Managing risks is a key factor in successful trading.
If you keep your losses limited, by minimizing the impact of potential risks, you will be able to stay in the market for a long time. To achieve this you have to calculate your losses per trade. Stick to the 1% common risk rate for each trade. Also consider a proper risk-to-reward ratio of 1:2 or 1:3, meaning that potential profit should be triple or at least double the potential loss on the trade.
Using a stop loss order will help you minimize losses as possible if the market goes in the other direction by automatically closing a trade when the price reaches your set price level.
Understand Trading Psychology
The trading psychology refers to the mindset of any trader that guides the decision making. It is the mental state that shapes how a trader reacts to gains and losses occurring from trading. The ability to handle emotions and stick to the trading plan. Similar to other trading aspects, like knowledge and experience, trading psychology is a key factor for profitable trading.
Most emotional decisions are driven by either greed or fear, the two most common emotional outcomes from trading. The two have a powerful influence on a trader’s decisions. For instance, greed pushes the trader to make too risky decisions aiming for unrealistic profits. Fear, on the other hand, restrains the trader from seizing opportunities in order to avoid risks.
Keep Your Emotions Under Control
Making trading decisions based on emotions is the main reason why so many people incur trading losses. Being controlled by emotions makes you more vulnerable and increases your risk exposure. The best way to avoid this mistake is to develop a stable trading mindset backed by a trading strategy that you strictly follow.
Develop a Positive Trading Mindset
The trading mindset is defined as the set of notions that shape how you perceive and react to different trading challenges. It is the personal beliefs that determine personal behavior and mental attitude. The way you perceive the market, the trading process, and your personal attitude determine how successful your trading can be. Your mindset plays a vital role in how you adapt to trading challenges.
By developing a positive trading mindset, you’ll never let your emotions control your decisions. Successful trading decisions should be stripped of psychological and emotional influences. Accepting the fact that emotions exist and get intense is a very important step. We are humans after all. Through trading, we are all exposed to certain feelings like greed and fear. So, mastering your emotions and your mindset will put you on the path to success.
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