Also, taking a cognitive view, be aware of your thinking in such situations. What types of thoughts do you typically have when you are in a losing trade? ‘The market always goes against me’ ‘This shouldn’t be happening’. These are not useful thoughts as they heighten your stress levels. Ask yourself ‘What would a great trader in a similar situation be saying to themselves?’. This can help you to direct your thinking and as a result affect your feelings and drive more positive behaviour.

Another way to manage your thinking is to actually create some ‘cues’ that you can repeat to yourself when you are in a situation of possible loss to direct your thinking, feeling and emotion and to also override any unconscious and habitual responses that you may have developed.  Remember that where you place your attention impacts on emotion and discipline. Focus cues that keep your mind on your trading process and on doing the right thing (probably not the easy thing) at the right time for the right reasons can be very helpful for example ‘I am a winning trader because I follow through with my trading plan’.

Step 3: Recovery

The third step is all about ‘Recovery’.

Once the trade is closed out a loss has been realized what can you do?

1. Check-In. How are you feeling? On a 1-10 scale where 10 is positive trading states and 1 is the other end of the scale where are you right now?

2. Evaluate and assess the reason behind the loss. What type of loss was it – losing trade or bad trade? Is there anything to learn from the trade, or action to take going forward? If you have had a strong emotional reaction to the loss then now may not be the best time to evaluate as your mood will bias your evaluation. Our mood for example has a strong influence on memory recall.

3. Manage the reaction.  There are a number of ways that you can manage your reaction to a loss.

At a cognitive level you want to be aware of your thinking and your perception of and the meaning you are giving to the loss. The meaning of a loss is the meaning you give it. A loss does not for example mean you are a loser. You can take a different perspective by taking a wider lens – what can I learn from this; or a longer lens – how will I feel about this at the end of the day, the end of the week, the end of the month, in 6 months, a year, in 5 years?

At a behavioural level you could use breathing or relaxation-based techniques or take a walk or go for some exercise to help you to manage the feeling of the loss.

Sometimes, it is just a matter of time. A session or day out of the markets can often be enough to help you to shake off some of the emotion, to regain some perspective and be ready to trade again.

4. Re-focus. This is all about getting back and ready to trade again – that means mentally, emotionally and also strategically. Remind yourself of your trading plan, take a centering breath and then go.

In Summary

If you want to be good at taking losses, to develop the skill that will help you to improve your chances of becoming a long term winner then remember:

• Reduce – inoculate against strong reactions to losses by reducing the number of avoidable losses, bad trades; by managing position size and exits; and by developing a mindset that has a more positive perspective on losses.

• Respond – by directing your thoughts and focus or managing your breathing to create states that enable disciplined trading behaviour.

• Recover – by checking-in, evaluating, managing your reaction and refocusing.

Steve Ward
High Performance Global