Accept losses in trading: a process that requires internal work.
Losses are assumed by the trader as synonymous with failure, they hurt to the point of seeking to reverse the situation to heal a pain that at the moment seems to be felt in the chest, the loss of money hurts, but perhaps feeling unsuccessful hurts more, it is there where the ego does its thing to lead the trader to ask himself over and over again if trading is for him.
The ego plays an important role in the irrational behavior of the trader, it shows both sides of the coin, on the one hand, the euphoria of feeling infallible and on the other hand, the misery of feeling unsuccessful.
The ego makes the trader feel that he is infallible, that he has absolute control of what will happen in the future, he seeks perfection in his operations, because he is always right, and he feels fully confident in establishing forecasts and predictions with 100% certainty because he has all the information in his possession, then nothing can go wrong, because everything is in his favor.
The ego seizes the reason of the trader, encouraging him to continue forward, because he is an expert in the field, with the necessary ability to handle contrary situations, since he will overcome any setback, everything is in his favor, just he needs a tiny time and everything will return to its path of positive profit, you are a winner so nothing will prevent your success.
The reality is different, uncertainty is the soul of the financial markets, opportunities for all and advantages for none, the future is unknowable, it is possible to determine the probabilities of an operation, but it is not possible to know the future with certainty.
A trader can’t handle all the information on the financial markets, he only knows a fraction, without losing sight of the fact that the millions of participants are irrational people and can change their minds at any time.
The impossibility of having the certainty about what will happen with a trading operation is what is known as risk, and this, like uncertainty, cannot be eliminated, it can only be accepted.
Losses are often associated with uncertainty, however, they are associated with risk, which cannot be eliminated, but can be controlled, and the way to control it is by establishing a risk management plan in operations.
The financial markets can be analyzed to identify the trend in the temporality to operate, with a greater probability of success, it is there that the trader establishes certain rules to establish limits in his operation, considering that there may be a margin of error in the analysis carried out previously.
These rules put limits on operations, allow the trader to operate with risk management, determine the amount allowed to lose without putting the account at risk, and adjust the volume and the stop loss per operation.
Complying with these rules is decisive in the trader’s operations, for this, the trader must understand that he is human, he can make mistakes and is not infallible, and that he may at some point have some type of cognitive bias that can influence his decision making.
Once the irrational and non-infallible human condition is accepted, it is necessary to take responsibility for their actions and assume that they are the only person who can press the button to buy or sell.
This requires an internal process, where the trader accepts that discipline is necessary to fully comply with the rules, and sticking to them requires self-control, assuming that no one else can play that role.
- Look for efficiency, not perfection, stop fighting to be in control and to be right, that is a very heavy burden.
- Accept uncertainty and control risk to protect your capital.
- Identify in the graph of your analysis, which is the point that can give you a signal that you have a wrong analysis or it can be a concatenated one, place the stop loss there or cut the loss quickly.
- Accept losses as part of the process, you can be wrong in an analysis, you are human, remember that risk management protects your account from ruin.
- If taking a loss leaves you depressed or feeling revengeful, it’s a good sign to start working on getting to know yourself, losses are part of the trading business.
- If you are not prepared to take a loss, it is possible that you will panic and that will lead you to make a series of mistakes that will put your account at risk.
- Keep in mind the importance of volume and risk-adjusted stop loss per trade (maximum 1%) 100 consecutive negative trades are required to lose an account.
- If taking a loss brings negative recurring thoughts then it is time to stop trading, take the time to disconnect, then review the analysis and make decisions with a clear mind.
- Accept responsibility for your losses, if you can’t bear a small loss it may lead to big losses.
- If you still have trouble accepting the loss, remember that a negative operation does not define you, it is the result of an operation that has a controlled risk.