Losses are an inevitable part of trading. With experience, traders will learn how to accept them and actually gather useful lessons from them.
A large trading loss can be devastating — not only financially, but emotionally
As defeating as losses feel, how we react to loss that is more important than the loss itself. Inexperienced traders suffering a large loss can become hijacked by their emotions. Some may try to trade through the pain, denying it, often creating more turmoil for themselves. Some may withdraw, sweeping the loss under the rug to avoid thinking about it. Others may hunker down and try to “trade better,” determined to recoup the loss.
One of the fundamental principals of trading stocks, or anything for that matter, is; you never play with money you cannot afford to lose. You should not be trading money needed daily expenses. The reason for this is, no matter how sound a system or piece of advice may sound, trades often go against you. Trading money you can afford to lose means that you have money to live, some money saved for a rainy day, and some for trading.
Now, by trading money you can afford to, or are willing to lose means just that. Even a successful trader’s account may experience dips or losses at many points. In fact, being willing to lose, or admit loss is essential to trading.
What does this mean? Willing to lose in order to win? Think of it this way.SBI has been going up every day so you think let me also enter the stock and make money like my friends are making.
You’ve bought 500 SBI stock that’s worth 100,000 You’ve decided that this should and will go straight up, all the way to the moon. You’re so sure of this. In a few days the stock worth falls to 95000 . It hasn’t moved the way you expected, but you don’t sell it because you want to at least get your money back. You don’t want to live with 5000 loss, because you don’t take losses. You’re a winner damn it! You check the trade a few days later and it has now slipped to 87000. If you get out now you will have lost 13000. Your friend says, “Hey, better ride it out.” So you ride that 87000 trade down to 60000. It should bounce back any minute now, right? 3 days later, we’re at 65000. The downward journey continues 63 K , 60 K , 55 K and 40K . You’ve had enough! You’re out at 38000.
I don’t think this scenario is reaching too far, or reflecting on events that could never happen. The point of this story is to point out how avoiding losses actually leads to more loss. Now let’s look at this scenario another way.
You’ve bought 500 SBI stock worth 100000. You’ve decided that you’re only willing to lose 1000 on this trade BEFORE you made the purchase. Meaning, you still expect the stock to go to the moon, but if it doesn’t, you want to get out so that you have 99000 as your trading capital (and not 38000) to make the next trade. You buy the stock for and It starts to fall. It hit’s your stop loss , and you’re out. You’ve lost! You’ve accepted it. You’ve moved on, with 99000 in your pocket.
Risk cannot be controlled without admitting and accepting losses. This is the only way to stay in the game to make other trades, giving you the opportunity to get some winners in the future. This of course is a simplified scenario, but the principal can be applied to many situations.
Here are few steps successful traders take after a loss to become emotionally stronger and more disciplined:
Accept responsibility: You made the loss; be sure to own it. Don’t brush it aside, hide from it, or blame the “smart money” for your loss. When you take ownership, you control your trading — and that’s exactly where you want to be.
Stop trading: Take a break to figure out what went wrong. Assess what happened by reviewing events carefully. Think about where you fell short. For example, did you take too much risk? Was the trade well-planned? Were you mentally sharp, or did you hold a losing trade hoping to avoid a loss?
Have a plan: Make a detailed action plan for future trades. The ingredients of your plan should include things you will do differently (e.g., setting and honoring a stop) and also what you will no longer do (e.g., holding a loser, hoping it will return to break-even).
Use a trading journal : Most successful traders use a trading journal to record their trades. Whether it is a losing or winning trade, your trading journal may include the entry and exit levels, the win or loss for the trade, some notes about your mindset and emotions during and after the trade.
Most trades that go strongly against us do so because of detectable reasons. Can you identify key market actions (e.g., changes in momentum, volume levels, price activity) that you can recognize and profit from? This will give you clear criteria for a trade not working and a fresh, new edge. Equipped like this, you are far less likely to suffer large losses in the future.
Taking a loss is a fact of trading. If you trade to make profits, you will face many more losing trades than winners. But just because you lose more than you win, doesn’t mean that you won’t trade profitably over the long run. The fact that you lose trades is not an issue. The issue is how you cope with losses. If you view them as nothing more than a minor setback, you’ll get back up and make trade after trade in order to come out of it. But if you are stunned and disappointed, you’ll actually give the losing trade more significance than is warranted. And in the end, you may end up losing money over the long run. So practice taking losses effortlessly. You’ll trade more profitably in the long run.