MySAR for 19th February

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.