The primary goal for any trader is to maximize winning trades and also to have as many winning trades as possible. However, where most traders go wrong is thinking that EVERY trade will be a winner and then becoming emotional when they hit an inevitable loser. Since most traders do not know how to lose properly, they typically experience a string of consecutive losing trades that significantly drains their trading account. It is these large series of losing trades or the ‘cycle’ of losing trades that we need to learn how to break, and in today’s trading lesson I am going to give you some concrete tips to help you avoid experiencing a large series of emotionally-induced losing trades…
Every trader has losing trades; in fact we can even say ‘losing is part of winning’ as a Forex trader. Whilst losing trades are indeed a part of trading that we cannot avoid, it is important to learn HOW to lose effectively. This is not a topic that is discussed very often since it is not exactly ‘hot’ or ‘catchy’, but I can assure you that until you know the correct way to lose a trade you will never become a long-term winning trader.
What does losing ‘properly’ mean?
In the opening paragraph I eluded to ‘losing properly’. You may have thought this sounded a little bit weird if you aren’t a very experienced trader or if you are still in denial of the reality of what it takes to become a successful trader. So, I want to explain what I mean by ‘losing properly’…
Basically, losing properly means accepting a losing trade and NOT BECOMING EMOTIONAL. How many times have you had a trade turn into a loser that you thought was the ‘perfect’ setup that just could not fail? It is these situations that give most traders trouble and cause them to become emotional after a loss. You have probably experienced a large string of losing trades after a trade setup that you thought was ‘perfect’ failed to work out how you thought.
A truth of trading is that no one ever knows and can never know what is going to happen in the markets with 100% accuracy, at least us small-time retail traders that is. So, if you believe this fact and accept it, you should always be consciously aware of the fact that every time you enter a trade you COULD lose the money you put on the line. Even if you are a master price action trader and your yearly success rate for your price action setups is say 80%, that still means you are going to lose 20% of the time, and the key here is that you never know WHICH trade will lose and which will win, so you HAVE TO practice proper Forex money management on EVERY TRADE you take.
The point here is that if you fully accept that you could lose on any given trade and you manage your risk properly as a result, you should largely eliminate any potential for becoming emotional after a losing trade and this is the key to both breaking a cycle of emotionally-induced losing trades as well as helping you avoid large strings of emotionally-induced losing trades.
How do you lose ‘properly’?
(Note: there are emotion-induced losing streaks and ‘natural’ losing streaks, some losing streaks are just a natural part of trading that we have to deal with by controlling our risk on every trade, but the losing streaks fueled by emotion are preventable and these are what I am talking about in this article)
Now that I’ve explained what losing properly means, and that you have to eliminate emotion after a losing trade in order to break an emotionally-induced cycle of losing trades (or avoid one), I want to give you some pointers on exactly how to eliminate emotion after a losing trade:
• STOP TRADING
It can be difficult to ‘wake up’ when you are in the middle of an emotion-fueled account-blow out, but if you can manage to take off the blinders for a minute and realize that you are out of control, the best thing to do is to simply stop trading, at least with real money. There’s nothing wrong with going back to demo trading to regroup or simply taking some time off from the markets all together. Indeed, if you are in the middle of an emotion-fueled losing cycle, it is unlikely that you can ‘trade your way out of it’, so instead accept the reality, take your losses, and regroup.
• START LEARNING
If you are experiencing cycles of emotion-induced losing trades and large strings of losers, you probably have some learning to do. Go and read some of my other Forex trading articles that cover topics like trader psychology and money management, these are likely to be of great benefit to you while you take some time off from the markets to regroup.
• RISK MANAGEMENT
Perhaps the most important aspect to losing properly and avoiding large strings of losing trades is simply to manage your risk effectively as you trade. Many traders email me looking for concrete rules to risk management, but in reality there are none because every trader’s financial situation is different. The dollar amount that you risk per trade is very important to your overall emotional state as you trade the markets. If you risk an amount that causes you to think about your trade all the time and lose sleep over it, you are obviously risking too much. My general rule of thumb is to always risk an amount that allows me to totally forget about the trade. If you are 100% OK with losing the money you have risked on a trade you will not lose any sleep over your trades and you will not become emotional after a losing trade. This is the KEY component to breaking cycles of losing trades and avoiding them in the first place.
• PATIENCE / DISCIPLINE
If you can manage to not jump back into the markets after a losing trade only because you want ‘revenge’ and to try and make back your lost money, you will largely avoid cycles of losing trades. When you trade with discipline you are able to employ the patience that you need to only take obvious price action setups and this allows you to avoid many less-obvious / low-probability trade setups. Ending your cycle of losing trades is all about recognizing the things that make you emotional in the market and then eliminating them. However, the trick to this is that you need to possess the self-discipline to actually not do the things you know you are currently doing wrong. Discipline in any area of life takes conscious effort, whether it’s going to the gym 4 days a week or trading the markets, if you want to reap the long-term benefits you have to put yourself out of your comfort zone for a while. Changing your habits in any area of life is often not comfortable at first; it is only after we go through some mild discomfort via employing discipline that we see our efforts pay off.
• DEMO TRADE
Demo trading is a tool you can use to stop a cycle of emotion-induced losing trades. When you feel like you are out of control in the markets and you know you are ‘running and gunning’ instead of trading like a sniper, try going back to a demo account to eliminate the emotions and regroup. This is probably the easiest way you can stop a cycle of losing trades because you still get to participate in the markets but you don’t have to risk losing any more money.
• BECOME A FOCUSED SNIPER WHEN YOU RETURN TO THE MARKETS
While you are taking some time off from real-money trading to help break your cycle of losing trades, it’s a good idea to train yourself up on an effective trading strategy like price action trading. Trading is largely a game of trial and error; most traders need to learn the lessons of over-trading, over-leveraging, and not having a mastered trading strategy the hard way, that is by losing a lot of time and money. So, make sure you learn something before you try your hand at real-money trading again. Take the time to truly master whatever trading strategy you are interested in, until you are consistently profitable on a demo account. Then, when you have everything in-line, including 100% confidence in your ability to trade your strategy, a well though-out Forex trading plan and a trading journal to track your progress, come back to the markets and try your hand at real-money trading again.