People tend to get started in day trading with false expectations. Any education provider for trading that is honest, will address the fact that taking losses in trading is not only possible, even likely, it is to be expected. As we discuss at the Fx365 Institute, the game isn’t to learn how not to take losses, but to simply keep your losses small and win more often.
At an intellectual level, this is very easy to comprehend. When you step into the boxing ring however, it is an entirely different story. A famous boxer once said, ‘everyone has a plan until you get punched in the face.’
With all of the aforementioned context, it never ceases to amaze me just how rattled I can get from taking a loss. Although taking a loss is a normal part of the business of trading, it is not uncommon for students to develop an expectation that they can become the exception to the rule and take few to no losses.
This is a dangerous trap to fall into because it is entirely unlikely, in fact nearly impossible.
A better idea is to have a conscious and established framework of what action steps to take after a loss.
Step 1 – Walk away! In some of the early ‘Market Makers Business Model’ videos, Wade suggests not taking another trade for AT LEAST a half an hour. Although you may miss out occasionally on a good setup, developing this behavior will help you avoid poor emotional decision making processes, revenge trading, and additional unnecessary losses.
Step 2 – Evaluate your position size. If you immediately place another trade with the same lot size as the previous trade, this next trade will expose your account to more risk than the last. It is counter intuitive to scale back your position size, but it WILL keep you in the game to trade another day.
Step 3 – Get real with why you took a loss. Did you place a trade because you were bored, or greedy? Or did you take a trade at a high probability entry point and it just didn’t play out in your favor? If you can be honest with yourself, you can avoid unnecessary pain via further poor decision making.
Step 4 – Win the next trade. Winning Futbol Coach Arsene Wenger has a philosophy about losing. “The most important thing after suffering a loss is to win the next match.”
Sounds self evident, but in reality, 90% of the time losing on a trade is a result of poor judgement. Thus, by having patience, following your trading plan, and trading a highly likely setup, you CAN win the next trade. This is what you need to do to stay confident, and by following rules 1-3, you increase your chances of this tremendously.
Until next time, stay thirsty fellow pippers.