Losing Like A Winner

3 Steps To Help You To Deal With Trading Losses More Effectively

/forex training losing like a winner

One of the few aspects of trading where you can experience some certainty is that you will have losses. Losses are a part of trading and one of the key differentiators of the best traders from the rest is not in how many losses you have but  in how you deal with those losses. Becoming a good loser is the key to becoming a long term winner.

How do you currently deal with your trading losses? How do they affect you? What Is the impact on your trading performance and results?

Let’s look at a three step process that can help you to become better at dealing with your trading losses.

Step 1: Reduction

The first step in dealing with losses effectively is ‘Reduction’.  Reduction is key because if you get this part right then you have less to deal with and manage in steps 2 and 3 – it is essentially a kind of inoculation.

There are three aspects you can reduce in your trading that will impact on how you deal with losses.

1. Reduce – the number of losses

Reducing the number of losses is not about trying to reduce losses per se as this is not realistic, but refers to focusing on trading your strategy, being disciplined, and reducing losses that, for example, arise from taking trades that are not  a part of your strategy and are therefore avoidable. A loss incurred from a disciplined trade is exactly that, a losing trade, a part of trading. A loss incurred from an ill-disciplined trade could be seen as a bad trade, and something that was avoidable.

2. Reduce – the size of your losses

This is obviously all about risk management. It is important to recognize that big losses have a greater emotional and neurological impact and can often drive trading behaviours that are generally not useful, such as revenge trading.  Your position sizing and your trade exit strategy will determine how big your losses are so managing and becoming skilled at both of these is key.

3. Reduce – the impact you have mentally and emotionally to those losses

Your response to a loss is a factor of how you lost (were you disciplined or not), the size of the loss and also your perception and beliefs about losses. If you hate to lose, and feel that you should not have a losing trade or lose money trading, then your response will be very different from someone who has a more realistic mindset, who accepts that losses are a part of trading, that the outcomes are probabilistic, that not every trade will win.

Do you fully accept that losses are a part of trading?

Do you fully accept that every trade has a non-guaranteed, probabilistic outcome?

Step 2: Responding

This step is all about how you actually cope in the moment once you realize you may have to take a loss. Taking a loss is very rarely easy due to factors such as our ego, our desire to win and our human tendency towards loss aversion which is why the ‘Reduction’ phase is so important. However, even with step one in place taking a loss can still be difficult, even more so if we have had a previous loss or losses, so it is useful to have some strategies that can help you to stay calm, focused and disciplined in the heat of the moment. 

For many people it is a feeling of anxiety or anger that stops them from getting out of a trade when they should. The emotion they experience drives behaviours that are not the most appropriate or disciplined at the time. Being able to manage your emotional state in real time, to keep your trading brain open and active, composed and disciplined is key.

One quick and easy way to manage your emotional state is to manage your breathing. When you enter stress based states typically your breathing will change – often becoming quicker and shallower – so taking some longer, slower breaths, from the diaphragm, and with a long slow and controlled outbreath (the bodies’ natural relaxation response) can help to reverse the stress response and keep you calmer and more composed and importantly disciplined.

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