Psychology & Risk: POST 4
Let’s get one thing straight right now: You are going to lose trades. Period. End of story. Anyone who tells you otherwise is selling snake oil. Even the best traders on the planet have losing trades, sometimes strings of them. Trying to avoid losses entirely is like trying to avoid getting wet while swimming – impossible and sets you up for a world of hurt.
The real difference between traders who stick around and those who flame out isn’t if they lose, but how they handle it when they do. Especially during those inevitable rough patches when the losses start piling up – what we call drawdowns.
The Losing Trade Grief Cycle (Yeah, It’s a Thing)
Ever notice how a bad loss, or a few in a row, sends you on an emotional rollercoaster? It often looks something like this:
- Denial: “Nah, it’ll bounce back… just a little dip…” (This is when you might stupidly move your stop further away).
- Anger/Frustration: “This stupid market! My strategy sucks! Everything sucks!” (Prime time for irrational revenge trading).
- Bargaining: “Please, please, just get back to where I bought it, and I promise I’ll get out…”
- Fear/Despair: “I’m just not cut out for this. I lose all the time. Maybe I should just quit.” (Hello, analysis paralysis).
- Acceptance: “Okay. That trade didn’t work. It either fit my plan and failed, or I messed up. What’s the lesson here? Time to log it and look for the next valid setup.”
Your goal? Get to Acceptance ASAP, like a professional taking a calculated business loss, and skip the drama in between.
Why Drawdowns Feel Like a Punch to the Gut
A drawdown is just the dip in your account value from its highest point. A string of losses naturally causes one. They sting because:
- It Costs Money: Duh. Losing capital never feels good.
- It Crushes Confidence: A few losses can make you question everything – your strategy, your skills, your sanity for even trying this trading thing.
- It Breeds More Fear: When you’re in a drawdown, the fear of the next loss can be paralyzing, making you hesitate on good setups.
How to Handle Losses Without Losing Your Mind (or Shirt)
Treating losses professionally is your key to survival. Here’s the playbook:
- Reframe Losses: They’re Business Expenses: This is HUGE. Think of your planned stop losses not as failures, but as the cost of doing business. It’s the price you pay for the chance to catch those winners. Like rent or inventory for a regular business. It’s just part of the game.
- Did You Follow Your Risk Rules? After a loss, ask yourself: Did I stick to my % risk per trade? Was my stop loss placed logically based on my plan before I entered? If yes, then even though you lost money, you executed your risk management correctly. That’s a process win! [Beginner’s Guide: Risk Management]
- Review, Don’t Stew: Log the losing trade in your journal. Objectively figure out: Was it a good setup by my rules that just didn’t pan out (happens!)? Or did I screw up (chase, break rules, etc.)? Learn the lesson. But then – and this is key – let it go. Don’t mentally replay it for hours. Reviewing is good; ruminating is toxic.
- Know Your System’s Norms (Eventually): As you trade more and track your results, you’ll learn what’s “normal” for your strategy. What’s its typical win rate? How deep do drawdowns usually get? Knowing that losing streaks are expected makes them less terrifying when they happen.
- DON’T Abandon Ship Mid-Storm: The absolute worst reaction to a drawdown is to panic and start randomly changing strategies or breaking rules. If your plan has a proven edge, trust the process. Ride out the variance.
- Size Down to Breathe: Feeling rattled by losses? It’s 100% okay to cut your position size down for a while. Risking less per trade lowers the emotional temperature, lets you keep practicing your plan, and helps rebuild confidence without risking big chunks of capital.
- The Power of the “Off” Button: Feeling overwhelmed, angry, or scared after losses? STOP TRADING. Seriously. Close the platform. Go for a walk. Call a friend. Trying to “trade through” intense negative emotions almost always leads to more damage. Sometimes the smartest trade is hitting the brakes and resetting for tomorrow.
Handling losses well isn’t about being numb; it’s about managing the inevitable emotional response constructively. It’s about being resilient, learning from mistakes, and sticking to your guns (your plan!) when things get choppy. Get this right, and you’ve overcome one of the biggest obstacles in trading.
- What’s Next? To handle losses well, you often need to wait patiently for the right opportunities. Let’s talk about cultivating patience and objectivity.
