HANDLING TRADING LOSSES EFFECTIVELY
I
have been hearing some stories of traders/investors who have lost quite a sum
of money in the last few days. The most worrisome part is that some folks have
borrowed money for trading and have lost it as well and now it has become
impossible for them to repay borrowed funds. Few some other folks who are
managing other’s money (PMS) have also lost substantial amount too and it has
resulted into distrust. Some folks not following any disciplinary rules, have
lost their savings by trading themselves too.
These
kind of losses happen in trading profession. So, thought of writing this post to see how to
take these losses in a positive stride.
1. Taking
ownership of losses – In fact no one is responsible for our losses except us.
Not the market, not the system, not the people who gave us the money to trade.
We have to just realize that we were wrong, we had taken risk, and we were
employing trading methods that did not work for any reason. No point in blaming
outside manipulators of markets or bad luck. We, as traders, need to accept
that we ourselves have completely and utterly made a
mixture of jumbled incongruous things and now
suffering therefrom. In a job scenario, we can blame others and get away with
it, but in trading we can not.
2. Stop trading right away – mostly
a trader might not like to hear this, but it is absolutely necessary. Take
the time to think about what had happened, figure out what was done wrong, and
make radical changes in the approach of watching market as a whole. Jumping
from one system to another or from one indicator to another will not solve the
problem. Most of us try to tweak our system after incurring heavy loss and it
also add to more losses. If a trader optimize the system with larger period and
create confidence in it, shifting of system would not occur at all. But if he
goes on watching market with short term period, it will be difficult for him to
build confidence for the system and it that case may result into heavy losses.
After incurring losses, one should stop trading until he resumes the confidence
for his own actions.
3. Refocus and relearn –
As said earlier, a trader after incurring huge loss in stock market should stay
away from trading for some time and use that period to do some home work for
introspection. Along with this he should concentrate upon other aspects of life
and career. In fact one should not become 100% dependable on income of stock
market in the initial stages. In the initial stages he must have some other stream
of income for livelihood. Depending only on trading income’ in the initial
stages of trading is probably the biggest danger. Trader should try to focus on
building the self-image with other aspects of life, not just with trading only.
In doing that activity, he can remain opportunity-focused and not
regret-focused. Please stay focused on what you could control, not on what you
could not.
4. See the setback as an opportunity to bounce back –
Loss always painful. But if you think that
you would never go through such an episode again in future, it will definitely
help you to recover loss. Market is forever, it is not going to stop tomorrow
but in future it will give so many opportunities to recover losses and earn
money through trading. Just be positive in watching each opportunity.
5. Handling depression –
a trader need to figure out how to handle depression. A loser always suffers
from the feeling of depression. Monetary loss results into the hurdles in
dreaming and hence depressed feelings
are normal reactions of loss. But if he continues to remain depressed, how can
he focus on learning from his mistakes and concentrate on other aspects of
life.? For recovering loss, he has to come out from depression sooner or later.
Positive thinking is the only solution for a losing trader. If he continues to
hold negative thoughts in his mind, he never concentrates on learning and
finding his mistakes responsible for his losses.
6. Get out of need to make money mindset –
Many a times a trader is attached with the feeling of trading only to make
money. And that is wrong. Earning must be result of his trading, but it should
not be at the cost of his employed capital. Hence the basic objective of any
trading in stock market is to protect the employed capital rather than earning
money. Earning money along with protection of employed capital should be the
objective of trading. Now if he concentrates only on earning purpose without
caring his capital, he will definitely lose his entire capital sooner or later because
in that case he loses his discipline at all. But if he cares for his employed
capital, he may lose in some of trades, but not in all the trades and thereby
he can raise his capital slowly and step by step.
Moreover
in case of losing trades, a trader mostly trapped in thinking like “If I should
have bought there....?” or “If I should have sold here....?” Such type of
thinking make him gambler or may make depressed for the next trades and at last
his loss goes on accumulating. A trader must come out of such mindset if he
really wants to earn money or recover his losses.
7. Trading too large for our account size –
Swing in equity curve almost always is proportional to the negative effects of
the trader’s psyche. Higher the swing, higher the negative effect of psyche and
vice versa.
Precisely
for this reason the trade size should be right not too large nor too small in
co-ordination with capital. If trade size is too large with reference to our
capital, we subject ourselves to drastic swings in our profit and loss account,
and that subjects us to drastic swings in our mood. In turn, we make trading
with so many mistakes and bring a negative expectancy to each trade and at last
our capital wipes off.
It
is said, in trading, if we create drama in our returns, we’ll create trauma–and
that’s how trading career end.
8. Understand failure & success –
A trader must have enough technical knowledge of stock market trading. Before
taking any trade, he must have knowledge about both side (upward and downward)
levels so that if his trades goes wrong he can very easily understand the
reason of failure and not become depressed due to loss. In this understanding
of both profit and loss is important. If he knows the reasons of his success in
his trade, he will remain down the earth and not trapped in ego. If he knows
the reasons of failure in his trade, he will try to learn from his mistake and
not trapped in depressed mindset. Understanding the results of trading reduces
fear and negativity.
A
trader must know the reality that all his trades never give him profit all the
times, some may get failed resulting in losses. If all his trades give him
profits in all the times, he will be considered as God and that is not the
case. Loss in some of the trades is natural in trading activity and this fact
must be understood very well by the trader. Then only he can learn from the
mistakes committed, he can reduce the fear inflicted in losing trade and he can
earn money along protecting his capital.
9. Psychologically, it’s healthy to experience defeat and
then overcome it – It strengthens you to
battle back and win. If you lose the wrong way–by taking so much risk that you
can’t come back for the day, week, month, or year–you rob yourself of the
victory that could be yours by going from red to green.
10. Reveal the truth – In
most of the cases the losing trader has the tendency to hide the truth about
his failure in trading. He avoids to disclose his correct losses to his family
members. As a result of this, whatever trade he takes, he takes with stress of
hiding the truth and so loses his discipline in trading resulting into more
loses. A loss incurring trader mostly remain in psychological pressure for
hiding his loss. His mind mostly remains occupied in various unnecessary
arguments for his losses because he never wish to accept his mistakes among his
family members due to ego problem. Precisely for this reason, if a trader wants
to recover his loss, the first condition is to reveal the truth of loss before
his family members.
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