One of the biggest (if not THE biggest) issues that I have had to face in my trading is getting over a loss. Even if I did everything correctly, losses still affected me more than any win. To a certain extent, it is still something that I am working on.
Don't get me wrong, I'm not talking about a 50% loss or anything crazy like that. I (almost) always set my stop loss at 1-2%, I set an approximate profit target and let price action tell me when to get out.
But the losses were still getting me down.
It got to a point to where if I lost two trades in a row, I would stop trading for a week because I thought I was trading poorly.
But as everyone knows, two losses in a row is not necessarily poor trading. That's just how trading works.
So what is the solution to the “losing trade” blues?
I have found that asking these 5 questions after a loss have helped me keep things in perspective and take the next trade setup without lamenting over the last loss. You may not have to use these review techniques all the time, but I have found it helpful to be able to come back to this list whenever I feel that my losing trades are affecting my psychology.
1. Do I know my trade?
Before trading any setup, you should backtest it on the currency pair (or market) that you will be trading, for as long a historical time period as possible. I have found that Forex Tester is the best way for me to do testing in Forex, but there are other solutions out there for Forex and other markets.
Knowing the maximum number of losses in a row, biggest drawdown and other related statistics can prepare you for a few losing trades. Every system will have a losing streak, but keeping your head clear during the streak is more important than the money.
So if you are in a losing streak or even if it was just one loss that is bothering you, go back to your backtesting results and remind yourself that it is all a part of how the system trades. Being able to answer “YES” to this question will give you the conviction to move forward.
2. Can I reverse what happened?
Regardless of how much money you lost, there is no way to reverse what happened. What is done is done and you need to move on. If you traded poorly then rejoice in the fact that NOW is the absolute best time to figure out what went wrong and try to correct it so it doesn't happen again.
If you traded well and still lost money, then don't beat yourself up over the 10,000 things that you could have done. That doesn't do you any good.
Take the loss and move on.
3. Am I revenge trading?
Everyone does a revenge trade from time to time, it is human nature. But putting too many revenge trades together in a row can blow out your account pretty quickly.
Revenge trading is double trouble. Once you get into revenge mode, you start throwing rules out the window. Those rules are there for a reason…to make you money!
Then after the revenge trade, you beat yourself up for trading poorly and that can make you think that you are a bad trader. This leads to second guessing yourself and your systems.
If you lost your last trade, asking if the next trade is going to be a revenge trade can keep you out of trouble and psychological torment.
4. Am I risking too much per trade?
You could be trading well, but just taking a little more risk per trade than you are comfortable with. For example, you could see a setup that you know by heart and risk 3% of your total account on that trade. In your testing, you know that the setup has a 65% win rate and will usually yield a 2:1 reward to risk ratio.
Over time, the trade will make money…according to your backtesting.
But is that 3% a little too much risk for you? It may be OK for some people, but you have to protect your positive psychology and do what is right for you.
If you scale back to risking 1% on the trade, that may help you to see things more objectively and make winning and losing less of an emotional roller coaster.
5. Am I attaching too much of my self worth to this losing trade?
This was a big one for me. I have this blog…I'm trying to make it as a professional trader…I have to win. Anything less will be a public humiliation.
The situation will probably be different for you, but you get the idea. If you really want to trade for a living, then you will make thousands of trades over your career. However these trades do not define you.
Trading is one of the things that you do, but you are also a husband/wife, father/mother, friend, runner, volunteer, teacher, mentor, etc. Don't define yourself by your trading, remember that you also fill other important roles in life.
If you keep your trading in perspective, you will feel less of a need to be right all the time and allow yourself to trade well.
So next time you have a losing trade, ask yourself these questions. They can help you minimize the psychological impact of a losing trade.