How To Deal With Trading Losses
Education - Milan Cutkovic | 09 Dec 2019
In this article, we will discuss trading losses and how those negative results could actually help you improve if you deal with them in the right way.
Losses are an inevitable part of trading. With experience, trader will learn how to accept them and actually gather useful lessons from them.
Let us first start with the win/loss ratio. This is the number of winning trades divided by losing trades. For example, a trader who has 80 profitable trades out of 100, would have a win/loss ratio of 80 %.
However, it would be wrong to purely focus on that number and achieving a high ratio. For example, a long-term trader might have a win/loss ratio of only 30 %, but because he/she makes significantly more profits on the winning trades than what is being lost on the unsuccessful trades, he/she can still end up being a successful trader.
With scalpers, it is different. As they are chasing small movements in the markets, the risk/reward ratio is lower, and there is not much potential for realizing a huge profit in a single trade. Nevertheless, even scalpers don´t need a perfect win/loss ratio to be profitable.
Traders should accept losses as part of the business, and instead of trying to fight it, they should try to learn from those events. What is the best way to this?
By keeping a trading journal!
At the end of the trading day (or trading week if you are a long-term trader with only few positions), you can go through the trades that you took and analyze them. You might then spot if you did something wrong, and make the necessary adjustments.
This must not necessarily be an adjustment to the strategy itself, but to your behavior. The strategy might work well, but you could be breaking your own trading rules or managing the positions poorly. However, the only way to find out is to keep track of your results and make notes.
It is important to see if you followed your strategy and plan, how the entry/exit were executed and any observations that you consider are relevant.
Nevertheless, traders should not end up overanalyzing their trades, and also keep the bigger picture in mind.
CONCLUSION: Losing trades are part of the game, but there is also an opportunity to learn something from them. The most efficient way to do this, is to keep a journal and analyze the losing trades. This might give you insights about whether there is an issue with the underlying strategy, or if the trader might need to improve his trade management skills.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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