People do not like to think about losses, the problem with that is that losses are a major part of trading, they will happen. There is no one strategy out there that is loss proof and you will experience them, you will even experience losing streaks of 2,3 or even more losses in a row, this is a part of trading, this does not mean however that you won’t be profitable or successful.
There are a number of different things that you need to think about when you take a loss, some of them will have you questioning your strategy, others your abilities, but thinking about these things will enable you to better understand why you had a loss, or even multiple losses in a row and will enable you to better understand what it is that you need to do in the future to hopefully reduce the risk of having another loss for the same reason. If you are having multiple different losing streaks, then there is probably something that needs changing, not necessarily a major change, just a small tweak could be enough to remove those streaks from your future,
Are there patterns in your trading journal?
When you started out at trading, most places would have told you to keep a trading journal, the entire purpose of the journal is to help you out in this exact situation. As you would have been writing down your entries, exits, reasons for the trade, and anything else that you can think of, you can use this to help look for correlations between your losses and any potential differences that there may be to the wins. It is able to highlight mistakes that you may be making and will allow you to see this and then adapt your future trades to hopefully avoid making them again in the future.
If you are not using a trading journal, start using one, it is the only way to truly understand what your trading habits are and whether there are any similarities when you take a loss, it will allow you to focus on something that is clearly causing you to make a loss and will ultimately make your trading lot more transparent and easy to analyse. Use it and review it, make sure that you also note down any changes that you ake due to the losses, as you need to know exactly what you did and the effect that it had, this was if it works you can continue to use it and if it does not work, there is a record of trying it and the result of the change, so you can avoid trying it again in the near future.
Do you have a trading system?
This may seem like a silly question to you, why would we be trading if we did not have a proper strategy? You would be surprised how many people actually do this, it is mainly done by those that are either new to the trading game or those that have kind of given up and are now just simply gambling and hoping. You need to look back over what you do and what your plan says. Does it have specific entry requirements? Does it have proper risk management on those trades? Does it take losses into account in regards to overall profitability? These are some of the questions that you may need to ask yourself about your trading strategy.
The importance of ensuring that your strategy is complete is vital. The trading system is designed to give you your trading rules and your risk management and is overall designed to help keep you profitable overall and over a long period of time. If you trade without a system, it will only lead to losses, you may get a win here and there from a little bit of luck, but your overall results and your overall account will be in danger and we can be pretty sure that you will end up in the pile of the majority of traders who have tried and failed without a proper strategy in place.
Is your risk managed properly?
Risk, the voodoo word in trading, if you have got your risk management all set up correctly, then you will be able to survive a number of losses, hopefully, a lot of them if set up correctly. You need to think about how each of the losses is affecting your strategy, how much of your account is at risk with each trade? How much is the overall daily loss that you will allow? How Many losses in a row can your strategy sustain with your current leverage and margin levels? These are things that you will need to ask yourself if any of the answers concern you, then there may be something that you need to change.
Risk management needs to be one of the things that need to remain consistent throughout our trading, as soon as you change it, it can result in larger and more damaging losses. This does not mean that it can never change though, it just means that any changes that you make you will need to ensure that the change is there consistently for all future trades. Remember, the risk management plan is there to protect you and your account, ensure it is sorted before you start to trade for real and also make sure that it suits your strategy, there is no point trading with real money without one of these sets in place.
Classic Trading Mistakes
There are a number of different mistakes that people class as the classic trading mistakes, these include things like trading without a journal (we mentioned this above), not using stop losses or take profit levels, revenge trading, letting losers run and having some unrealistic expectations about what you want to achieve and how you will achieve them. These are all things that can lead to losses and will be far more common than you may think.
We would not be surprised if you had made one or more of these mistakes and unfortunately they can very easily lead to losses being main and then sustained. You need to be able to notice when you are making these errors and then correct them, but simply not doing it, that may not seem helpful but it is the truth, you just need to stop. Get your plan, journal, and risk management in place and trade using that, these will help you to avoid a lot of the mistakes that people often make.
The Wrong Expectations
Coming into trading with an unrealistic expectation can have some pretty bad effects on your trading and also the results that it brings. If you set your expectations too high then there is a much higher chance that you will over leverage or over risk your account which can have some very dangerous results, if you set them too low then you won’t see much difference or increase to your account balances. You need to ensure that you have got them set at the right level for both you and the strategy that you have been creating, this enables you to trade at a much more consistent level and you will also see some consistent results.
Is trading right for you?
Let’s be honest here, trading is not for everyone. Some people do not like the stress, others do not like how long it takes to actually become successful, others just simply don’t like the numbers involved in it or the risks that you need to take. There is nothing wrong with this at all, not every activity or job is right for everyone, some people will like it and others will not. If you find that you are getting bored or easily distracted then this is probably not the right thing for you. Having said that, it can also grow on you, give it a couple of months, if after those two months you are still bored or not really looking forward to your next day of trading then you may want to start looking for something else to do with your time as this may not be right for you.
So those are a few of the things that you need to think about when you are making some losses, it can be very easy to get swept up in the anxiety and stress that comes with a loss, but with the right things in place a loss is simply just another step in your trading journey, ask yourself these things, look at your journal to find those connections and work on getting rid of them. Use each loss as a learning experience and you will become a much better and much more consistent trader.