Trading Psychology · 2023-10-19

Trading Losses — How to Get Through Them?

Trading losses are unavoidable in investing and trading. I think no one can avoid losing. Even professional traders, legendary investors like Warren Buffett, go through losses.

The difference with professional traders is that they get through the losing cycle and make a profit. Most traders, meanwhile, lose a lot of money or, worse, blow their account. In this article I will show you why, and what we should do to improve our trading. And of course, the best content I usually leave at the end of the article — a reward for those who have enough patience.

Common types of losses

I can divide losses into 2 types: systematic losses and psychological losses. You probably find that strange, right? A systematic loss means your trading method gives a long-term win rate of about 50%, for example. The remaining 50% of your trades lose; those trades are considered systematic losses. You follow the trading method correctly, yet you still lose. This is a good loss, because it is part of your trading method.

Psychological losses are a completely different category. Losses of this kind are not systematic. They are like a domino effect that makes your account evaporate quickly.

The most common example is that you have a big winning trade; at this point you trade more confidently. You enter a trade but then encounter a few losses, or you have a profit but do not take it and get hit by the stop loss. At this point, you expect your trades to be big winners but receive losing trades instead. Then you get angry when the market does not follow your wishes. What will you do! You will enter a lot of trades just to prove you are right.

Or you enter trades not following your original method, then you lose and blow your account.

If you are too lazy to read, you can spend time watching my videos.

The nature of losses

I want to talk about the aspect of stop loss orders. When price reaches the stop loss points, it means you have lost and are pushed out of the market. A stop loss is inherently good; it helps you protect your account from mistakes. Because your trading method is not always right and effective. In addition, a stop loss protects you from the erratic fluctuations of the market.

In essence, a loss is good if you follow your rules and your trading method. For example, you are walking on a wall only 20 cm from the ground; if you slip, you will not have too big a problem either. But just imagine if you are walking on the wall of a high-rise building. The distance from you to the ground is 20 metres. Just one slip and you could be gone. A stop loss is like a net stretched below your feet; it helps you stay safe even if the worst case happens.

Ways to help you reduce losses

Method 1: In technical terms, the trading method

• First: If you frequently get hit by your stop loss and right after that the trade goes in the direction you originally expected. I think you should widen the stop loss distance, but at the same time reduce the trading volume. So that the risk for one trade is fixed at an amount of money or a % of the account. Example: you accept losing 10 USD for each trade. You raise the risk from 10 pips to 20 pips; at this point the trading volume must decrease from 0.1 lots to 0.05 lots. The amount of money risked on your trade stays the same, but the probability of price touching the stop loss is lower.
• Second: Take profit at different price levels; I usually divide my trade into 2 parts. The first trade will take profit at the nearest support or resistance level. The second trade will take profit at a farther level. This helps you avoid trades that are in profit turning into losses when price does not reach the target. If price does not go to the position you expect, then at least you also have a profit or break even instead of losing and losing money. I always remind myself that a profit is only real when you take profit. And taking profit is never wrong.

Method 2: In terms of trading mindset

The next thing to help you reduce losses is trading psychology and mindset. This is the submerged part of the iceberg. If making money from trading were easy, this world would surely be in chaos. Because, simply, with just a few mouse clicks anyone could make money, and a lot of money. Therefore, I think that the human mind is not designed for the job of trading. There are aspects of trading that are completely opposite to human wishes and emotions. That is the issue of probability.

We are taught that when you make an effort and try to work hard, the results will come to you. This is completely the opposite in trading. It is a game of probability. If you do not understand the rules of the game, no matter how hard you try you will still lose.

You need to have a mindset about probability. That means you must believe that after a series of trades done correctly according to your method you will have a profit. That means you must believe the current trade or the next trade could be a losing trade. This is really very difficult and is usually unacceptable to most traders.

Training your trading psychology

In addition, you must spend time training your psychology. A boxer whose name I do not remember clearly said that he trained every day in his mind, feeling the pain of the punches. So that when he was in a real arena, he would get through those punches and wait for an opportunity to counterattack. That is the power of the spirit!

He himself understood that being punched is unavoidable. He accepted that truth and trained his endurance.

The same with trading: losses are unavoidable and you must accept them. Losses are a part of trading. The important thing is that you trust and follow your trading method correctly.

CONCLUSION

Losses are an issue that we usually avoid and rarely share with everyone. But they are an indispensable part of the game. I think that by adjusting our psychology and our trading method, you will achieve success. Trading is a long journey with no destination.

When you are disappointed, stop and rest, but do not give up.

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