How to Overcome Trading Losses

2022-01-21 | TG Watkins

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In this post:

  • What can be draining on our psyche and our account?
  • What is the most common mistake a trader makes in their path to learning?

As with most skills that are new to us and will take time to acquire, trading will involve many, many mistakes along the way. Those mistakes typically come in the form of losses, which can be draining on our psyche and our account. So, let’s take a few moments and discuss how to overcome trading losses since that’s crucial to becoming a successful trader.

Nearly every trader I know recommends reading anything by Mark Douglas. I own two of his books and I felt like he was looking over my shoulder at all of my mistakes, writing the book specifically for me. If I can relate to most of the topics he writes about, then that means I’m not alone and there are a lot of common mistakes a trader makes in their path to learning.

Determine How the Trading Loss Occurred

First things first, if you don’t know how or why the loss happened, then you can’t figure out the course of action needed to fix it. Let’s consider two different scenarios. Scenario 1 is the easiest: the loss wasn’t anything you could control or anything you could’ve accounted for. This could be a random news article, a buyout, a problem with their product or service, a lawsuit, or some public figure speaking about the company. Heck, just about anything that overrides the technical action of the charts (and probably while the market is closed) is outside of anything you could plan for. 

Scenario 2 may be a tougher pill to swallow: the loss could’ve been avoided. But within technical analysis, you have your areas of support, moving averages, indicators, and rules. So, what went wrong? Well, if you didn’t follow your rules, then that’s your mistake, and you need to be more committed to them. If your rules, when back-tested, aren’t giving you above average results, then your rules aren’t working well enough and you need to adjust them. 

Redefine the Trading Plan

Also keep in mind that a certain set of rules may fall apart when the market environment changes, which I think a lot of traders don’t consider. So you keep pounding away at what used to work but doesn’t anymore. If this is the case for you, it may be time to redefine your trading plan. You most likely won’t need to throw out all of your rules, but they’ll need to be adapted to the current market.

Here are some basic rules I practice to help reduce my risk:

  • Don’t trade over earnings
  • Position size responsibly
  • Don’t let a small loss grow into a big loss
  • Know the trend, and when there isn’t a trend
  • Don’t jump in before your rules are met even if you think it’ll meet the rules

One rule I would like to emphasize is not letting a small loss turn into a big loss. This one can get away from traders since something small can become large before you know it… and then you’re really in trouble. The market’s a tricky animal, giving you just enough hope to keep you in a losing trade with small bounces or days which will open positive, only to keep digging you deeper and deeper into the loss. Recognize when a trade isn’t working, and just take the loss. Moving on will clear your mind and allow you to try again with your remaining capital.

Evaluate Your Indicators

Are you new to trading? If so, you may still be trying to formulate a trading plan and a set of rules with your indicators. If that’s the case, then you need to make sure you’re building the right rules for how the indicators should work or how they’re being applied to the kind of trading you’re doing. This means that as you practice or back-test when a trade goes wrong and is not how you planned, you need to evaluate your indicators to make sure they’re communicating what you think they should be communicating.

One of the indicators I like to use as a cross-reference is the Slow Stochastic. When it gets to the bottom, it tends to demonstrate a low price is forming. So if I took that idea and wanted to use it on the high side of its range for either exiting longs or going short, I’d study to see if that works. When I did this, I found that the Slow Stochastic can stay at the top of its range for a long time and the price can stay bullish for a long time. I found that there wasn’t a good correlation between the Stochastic being high and the likelihood of price going down. So I’ve made it part of my rules to only use the Slow Stochastic on the low side for finding bottoms, and ignore it on the high side for exiting longs or taking shorts. This is a good example of how I’ve evaluated an indicator for my own trading needs based on my examination of its behavior.

Never Give Up After a Trading Loss 

A trading loss shouldn’t be a reason to give up trading altogether, but sometimes it’s prudent to step away and take a breather to clear your mind. Maybe that’s a few hours or a few days. Just enough to get your emotions back in line and your mind focused. But if you’re going to succeed as a trader, you need to keep at it. If your losses are small, you can play many hands. After all, it’s time in the market that you learn the most. I learned from many mentors, but ultimately, I had to take bits and pieces of what I learned from each mentor and put it into a method that worked for my trading needs. There finally came a time where I began treading water and my account actually started to grow. All those years of practice prepared me to take advantage of one of the greatest bull markets in history during 2020.

In one year, I was able to grow multiple accounts anywhere from 400% to 700+%. I was able to turn $700K into $5.5 million and grow $1.25 million into $8 million. Keep practicing, and the market will provide for you one day.

I can’t tell you how many losses I’ve had along the way to earning those numbers. Losses happen to everyone and you can’t let them discourage you. For more ways to connect, check out my Moxie Indicator Mastery program.

Here, I showcase my real-time entries and exits as well as offer daily market analysis. Or, if you would like to learn at your own pace, I have specifically designed classes to help you with your trading journey, including my course “Take It To Wall Streetwhere I show you how I made two million dollars in a day. Seeking out mentors is what I did when I started out as a student, and now I’m eager to share what I’ve learned over the years with you.

You can do it.

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FAQs on Trading Losses

Q: How do I recover my trading losses?

A: Make sure not to commit the same mistakes again: determine how the loss occurred, redefine your trading plan, or evaluate the indicators you are using.

Q: How do you gauge your risk tolerance?

A: To determine your risk tolerance you need to answer the question of what kind of trader you are and what is your focus when making decisions about strategies and position sizing. There are strategies out there for every risk tolerance.

Q: How important is discipline in trading?

A: A short answer would be: very important. Over the last 10 years, I’ve learned that what distinguishes successful traders from the 95% that fail is discipline.

Q: How do you build discipline in trading?

A: Key components of building a trading discipline: have a trading plan, know how often you want to trade and what asset classes, choose a strategy, and stick to it.

Q: Is it normal to lose in trading?

A: Yes it’s normal, every trader has experienced a loss in trading. The key is to minimize those losses and move forward.