Are You Still Taking Large Trading Losses?
When trading, you must first accept responsibility for your trades. Defaulting responsibility to ideas like manipulation or being trapped by other market participants is the opposite of taking responsibility for your trades. The market does and will do whatever it pleases within certain technical limits. As a trader, you cannot single handedly control the market. The market will not bend to your will. Taking a few small steps to change bad habits early, can help eliminate significant draws on your account.
Through discipline comes freedom. – Aristotle
A noteworthy contrast between successful traders and consistently unprofitable is the how they react to losing. A Good trader will view a drawdown as a chance to learn and enhance their trading. Getting back on the horse after getting knocked off is not always easy. The pain of loss does something to your trading psyche. You lose confidence. So how can you avoid large losses? Here are four practices that you can use to become a more disciplined trader.
Lose the Ego
Your entire life, you’ve been trained to succeed and have been punished for failure. Remember back in grade school when you brought your parents a poor report card? How did your parents react? The typical response is probably, “they weren’t very nice about it.” Accepting failure is part of the trading game. No matter how sound your idea was, you could still be wrong. Learn to respect the chart, because as we say, the chart don’t lie. If you find yourself struggling to cut your losses quickly, you aren’t going to last long as a trader. Consider an automated decision maker… hard stop losses.
Poor Position Sizing
If you’re starting out, it’s safe to say that your account size is fairly small. If you’re account size is small, why do you think it’s a good idea to take institutional sized trades? Are you a hedge fund trader? No. Then come back to reality and trade an appropriate position size relative to your account size. If you think that you’re missing out on a single trade because you didn’t go all-in, then you’re better suited wasting your time and money enjoy the thrills of the casino. I’ve good news for you if you’re serious about trading; trading is not to be treated like gambling. Your position size in any given trade should not make you flinch at any point during the trade. Neither should you feel nervous, nor should lose sleep over any position.
Adding to Losing Positions
If you have a basic grasp of trend and your trade is negative, then you should fairly quickly realize that your trade is wrong. Sadly, most traders don’t really understand trend. There are some exceptions to this rule, but generally, adding to a losing position will only make the trade lose even more money. It’s much better to add to positions that are already winning. For most people, adding to a losing trade is a sign that they cannot let go of their ego. They sit in front of their screens hoping the trade reverses into profit. As Denzel once said, “hope don’t get the job done.”
Failure to Plan is Planning to Fail
Did you take a trade with no exit strategy in mind? Did you enter a trade based on a feeling? Oh so you’re one of those feelings type of guy? It’s much more sound to enter a trade based on logic rather than entering based on feelings or emotion. The truth is most people fail to trade with any sort of plan. Maybe you’ve got a sound reason for entering a trade, but failed to consider that you could wrong. Did you define a worse case scenario? What’s your plan when the trade is negative? Failing to plan for a winning and a losing trade will result in the same outcome: large losses. Consistency is one of the keys to longevity. This means that you may have to consistently take loses. If that’s the case, just make sure that they’re consistently small and quick.
Learning to trade is one of the most difficult things you can decide to do. Why? Because the learning curve is so steep and you’re constantly fighting your mindset/programming. No one wants to lose money, yet when faced with the decision to actually force yourself to lose money by cutting a losing trade quickly, we tend to stutter. All of the learning, preparation and focus we put into trading really boils down to one thing – managing risk.
If you want to learn more about managing risk and day trading visit here.