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You know how it is. An idea for action pops up on your screen. You take a position, then nothing happens for a while, maybe it’s lunchtime, but in any case there is no movement in your transaction.
You wait. A first uneasy feeling arises. Then, some time later, the trade begins to move in the unwanted direction. A book loss builds up.
Escape to the front or to the back
A typical reaction is then to mentally draw on his experiences or hopes. However, this can quickly turn out to be a trap.
When you go back in your trading past with a losing trade, you automatically look for situations where a similar trade has turned positive. But also try to remember the situations where the turnaround didn’t come and the trades you didn’t finish in time led you into an even bigger dilemma. Close the door for a flight into the past.
Gladly we save ourselves mentally also into the future and get our hopes up. “When this and that occurs, and only this or that event occurs, then my position will be in profit.” This approach is even more daring since there are no reference points for action and we all know the saying: “Hope dies last.” Also, close the door on unrealistic hopes or future plans for your trade.
When you have come back to the here and now, you can take specific action.
If we expect better results from our trading, we must be prepared to make other decisions (otherwise the results so far would have been wonderful and I would never have written this article).
Now, what is the best way to effectively deal with losses? Five steps to get out of a dangerous state of shock.
1.not overestimate the loss
There it is, a losing trade. It’s certainly not your first minus trade and it won’t be your last, so look at it with some distance and objectivity. Take a walk, go jogging or to the swimming pool, or phone someone, do something else and then look at it again. With a little distance, the trade will certainly look very different.
Also try to separate the trade mentally. Many people tend to transfer a loss, a defeat to their whole life. Just because you lose 50, 500 or 5,000 EUR does not mean that you are a complete failure in life. It is only a small partial problem, a tiny construction site that needs to be solved. Don’t push the trade away, but don’t make a horror movie out of it that runs all day long in front of your inner eye.
2.face the truth
Okay, that trade was nothing. Your idea just didn’t work out. It happens to the best traders in the world. Steven Cohen once told me in an interview that his traders are wrong 50-60 percent of the time. I have already pointed out in many articles and lectures that the (us conditioned) claim of infallibility and the right handling of losses (mistakes are a great resource for improvement) are the biggest challenges in trading.
David Tepper once said: “Replaying losses in your head is the only way your learn from your mistakes”. I can only subscribe to that. I had to make some mistakes three, four or five times before I understood something.
The important thing is to admit to yourself that you’re wrong. But many traders don’t realize the freedom they have with their investment style. Those who trade actively and at short notice can get in and out at any time. And those who get out can also get in again at any time. So why run losses? The idea that I could re-enter later (which I rarely do) helps me to close a loss-making position painfully.
3.develop a strategy
It is very important to have a strategy over time on how to get out of a trade. Every person ticks differently. Personally, I can’t work with fixed stops because I’m constantly tormented by the thought of being stopped at an inopportune time. I have become very disciplined when it comes to closing a position manually. A step-by-step approach helps me here. If I notice that a trade is going against me or I just have the feeling that the trade is sleeping too long, then I simply take half of it out (message to my brain: I can buy back later, haha!).
Find a strategy to get out of your losing trades and find a way that suits you. Again, follow the success principle of the best. How do other successful traders deal with losses? Learn from them and see what seems to make sense for you.
Suitable article: The key to success on the stock market
At a certain point, of course, you have to “get going” (as my Bundeswehr instructor used to say). Large movements on the markets are usually spontaneous and very fast. If things go against you and you hesitate to act, it can quickly be too late and become unnecessarily expensive.
In order to force my action, I always think about what my maximum loss for this trade would be or what would happen if the market were to run against me again by so and so many percent. Pain is a good stimulus to trade.
The markets are always different and not every strategy for ending a trade is equally suitable for every trading day. Feel how the market swings on that day and you will choose the right strategy.
For example, if you trade the market in a sideways range, then a firm stop might make sense, because either the market stays in the range or it falls out. However, if you are trading a trend-following entry, then a more flexible stop strategy makes more sense, as corrections in trends do not always occur uniformly. Just because the current correction is slightly different from the previous one does not mean that your idea is wrong. Rigid concepts often fail in such situations.
Most investors only think about their potential profits or how much return this or that deal will bring them. When we focus on the losses, whether trading or investing, we gain a whole new perspective on the financial markets. Those who get their losses under control actually only have to wait until they make profits.