How you react to winning and losing can determine your long term success
Trading has its natural ups and downs and losses are a regular part of it. Its quite obvious that they can have a negative effect on whoever is experiencing them, but profits can also prove to be a problem, especially if you misinterpret them.
Here are our four tips for managing the potential pitfalls that come with losing:
- Do not increase your trade size after a loss. With emotions running higher and the sense that you’ve made a mistake, or that this is a failure, your judgment can be impaired. Each trade has to be seen as a separate event, with its own circumstances and motives.
- Take responsibility for the loss. This doesn’t mean feeling guilty or wrong, but rather not to blame it on external factors like the market itself, or on something that misled you.
- Accepting that trading is an activity that requires a certain amount of time and effort, but doesn’t always provide something to show for them. Not only can there be no profit at times, but losses can occur, regardless of your attempts. Expecting this and living with it will make your trading life smoother.
- Train your reaction to losing trades. Don’t be too harsh on yourself, even if a glaring mistake happens, take it in as part of the whole process. Once you achieve this mindset, the risks of losing and trying to get back your losses won’t endanger the next trades you make.
And here’s what to avoid when you do get some money in:
- Do not increase your trade size after a win. Just like with losses, there is a strong emotional reaction when you win. But your elation and fist pumping won’t necessarily translate into consecutive wins. The market might have changed or you might want to get back in the action too soon without the correct conditions in place.
- Stick with what’s working but be aware that it won’t last forever. Both professional traders and sportsmen are aware that there are things like form and external conditions, both favourable and negative. If we have to translate the old saying “Form is temporary, class is permanent” to trading, it would sound something like “Performance is temporary, ability is permanent.”
- Maintain a critical eye on what’s happening. It can be a bit hard to remain focused when you’re winning, but in trading it’s needed to keep up. Take a step back and don’t increase your risk until you’re sure it’s worth it.
- Make regular withdrawals from your profits. Although it obviously reduces your margin capability or future profits, this can reduce your stress level and lets you see the fruit of your labour. Money management will be reviewed in more detail in one of our next blog posts.
Being prepared for what’s coming next always gives you an advantage. Training yourself with a Practice Account and starting small in the real environment will give you a taste of losses and profits until your experience weighs in and keeps the above mentioned dangers at arm’s length.