Why do losing trades hurt?
This is a question all traders should ask themselves because, truthfully, losing trades don’t have to be a painful experience.
Yet many traders live in constant fear of the next loss. Let’s break down “why” of loss and what can be done to mitigate emotional reactions to a normal part of the trading game.
View a losing trade as a mistake
Too often traders view losing trades as a “mistake,” thinking that because a trade didn’t work they must have done something wrong. When we take entries, exits, and trade setups that aren’t a part of our game plan, that indeed is a mistake that can be avoided.
However, when we stick to our game plan, take the right entries and exits, and focus on the proper strategy, a losing trade is never a mistake. If you took your entry based on your setup, that is simply good trading. Whether or not the trade works in your favor is just an outcome of the random distribution of this numbers game we play.
Losing trades are a part of the game and the sooner you can fully accept this reality as a trader, the sooner you’ll stop reacting emotionally to losing trades. Even the best traders tend to lose 30 to 40 times out of every 100 trades!
Taking too big of a loss
Taking a big loss is certainly painful, but we have to realize that this is a self-inflicted form of pain and a large loss is nobody’s fault other than our own. This can be a tough pill to swallow, but it’s the reality of trading. When trading options, our risk is defined before entering the trade, meaning we know how much we are risking before we pull the trigger.
The moment before entering a trade is when you have to be honest with yourself and your risk tolerance. Rather than day dreaming about the size of your profits should the trade work, ask yourself whether or not you are truly comfortable with the risk you’re putting on the table.
My advice to avoid painful losses is to pre-plan and risk only a set percentage of your account on each trade.
Personally, I only risk on average about 2.5% to 5% of my account per trade and limit overall exposure (all open positions combined) to no more than 15% of my account balance. Doing so ensures I will never put myself in a position to put myself “out of business.”
I only have cash at risk that I am comfortable losing.
For a more detailed view of how I manage my losing trades, check out my most recent newsletter explaining how I limit my losses with my win rate.
These are just a couple of tips but if you are currently struggling with painful losses. Shifting your mindset and your attitude toward risk management can quickly put you on the path toward better trading!
Stay Focused!