In Continuation with Previous Post Problems Created by Trading Loss
The unfortunate part is that there is no easy fix How to Handle loss, but as a TRADER you need to get used to this.
Losing sucks; as humans we don’t like it and it results in a steady stream of trading problems. The good news is that there is a solution it’s just not easy.
Where the issue stems from doesn’t matter, ultimately you need to conquer it. That doesn’t mean you won’t want to avoid losses, it just means you accept those feels and don’t let those feelings affect your actions. It is within your control. Think about other areas of your life where you feel strong emotion, but don’t act on it. Instead you remain present, compose yourself and act according to your plan or principles.
Therefore, the first step in managing loss is to have a plan in the first place. If you get into a trade and don’t know how you will handle it if it moves in your favor, against you, or does nothing, then you shouldn’t be in the trade at all. Your plan of attack let’s you know what you will do in each scenario. It also let’s you know which trades to take and which to avoid.
That plan must provide details on how you will enter and exit positions, and then you must follow that plan no matter what sort of emotions you face while in those trades. Know there will be a strong compulsion to let a loss mount because you don’t want to realize/book the actual loss, due to ego or some other reason. You will feel these things. Admit it, and try to continually bring yourself back to your trading plan, letting the plan play out.
Do this in a demo account/paper trading until you are like a robot at following your plan.
Only then should you switch to real money–start out trading with the smallest position size possible so it is easier to maintain your robotic focus. Expect emotions to crop up again once you begin trading with real money.
If you have adequately tested your system, and it is profitable, then realize that the results of that system account for losing trades. You don’t need to avoid them–the losses are already factored into the profitability, so you don’t need to change a thing. Take your loss when you are supposed to; stick to the script. That’s the only way to realize the profitability of your system.
It easier said than done though. Therefore, I recommend all new traders, or any trader who is having trouble sticking to their trading plan, put out a stop loss order and a target at the outset of each trade. Then don’t touch anything. Watch, and simply sit on your hands. Don’t touch your orders, don’t touch your screen, just sit on your hands until either your target or stop gets hit.
Follow this method for at least several months. It will get you used to the feeling of discomfort, and most of all it will prove to you that your system is profitable just as it is, without your intervention (assuming it is actually a profitable system to begin with). Even if it isn’t profitable the exercise is a good one for discipline. Trading is mostly psychological–being able to overcome these trading psychology hurdles.
Not succumbing to emotional moments, and seeing a plan through is what creates great traders, great leaders, great generals, etc.
Many traders will find that letting the price just hit their stop or target, with no intervention, is fantastic, and the journey ends there. Others will want to more actively mange positions. Only after months, or hundreds of trades, of letting price hit the stop or target hit should you attempt to actively manage trades. Don’t skip steps, otherwise the same issues will continue to ail you. Practice discipline and following your plan by letting the price hit your stop or target, that is it. Only when that discipline is firmly entrenched should you consider more elaborate strategies or attempting to mange each trade according to a plan.
If, after developing your discipline, you decide to actively mange each trade still set a stop and target. The stop can never be expanded, but the stop can be reduced if the price moves in your favor. The target can be expanded or contracted, based on current conditions, but the expected reward should always be greater than the risk (stop) at the outset of the trade.