Welcome back to RoboForex Blog!
- Psychology of losses
- How to reduce your losses?
- How to cope with negative emotions?
- 3 rules of turning your losing trades into profitable ones
Today, we shall speak about our attitude to losses and its nature, about the ways to reduce them, about some mistakes and learning on them, and finally, about the ways of turning losses into a profit.
Everyone who comes to the market craving for money thinks that they will be among that 10 % of successful traders that can be called "cream of the cream". Such a way of thinking is logical and natural, because — who will ever aim at bad results? Well, a question emerges then: where do the remaining 90% appear from? What happens to them next? Why do these statistics of 90% losing traders against 10% gaining ones exist at all?
To be precise, the statistics change from a period to a period. On the other hand, it should be understood that every trader suffered a loss at least once, wasting their deposits due to a lack of experience, or out of excitement, or because their trading was unsystematic. Thus, we may conclude that 100% of traders do lose their money.
Those who are serious about trading try not to lose their spirits, put themselves together and take a fresh start, having a new attitude, new trading methods, risk and money management, which means they have learned their lesson well. However, some never return after just one loss.
I know a successful businessman and a major investor whose first experience on Forex ended up with a loss of $100,000. With a cold mocking smile, he said that if he failed from the start it was not his piece of cake. This view is all viable, but one has to have incredibly strong will to withstand such a major loss and keep on. Most often, such people return to the market sometime later. And yes, they constitute that 10 %. But what should the others do? They should follow the example: survive the loss, understand their mistakes, learn the lesson and start again.
It is all human that depression after a misfortune, a loss, a failure worsens the situation. The ability to take a loss adequately, to admit your failures and learn on them, to accept your failure rather than deny it is a critical psychological aspect of success on Forex.
Of course, for many, it is easier said than done. All great sports champions used to be outsiders at some point in their lives. However, they reached real heights thanks to regular training and the ability to accept losses. Same with trading: losses are natural, especially if you are a beginner (but it is no secret that experienced traders suffer them, too). In other words, you should treat losses as an axiom, as business expenses, as fuel for a car that cannot move without it, even being super high-tech.
Psychology of losses
To trade consciously, to understand and accept losses adequately, the trader has to analyze constantly not just the market but also themselves.
Psychological stability and confidence are crucial for the success of the biggest part of work. This important side of trading is neglected or treated light-mindedly by many. Feeling offended by the market that owes you nothing or blaming yourself prevents you from seeing the situation clearly.
From the psychological point of view, small losing trades are accepted easier if the trader knows that in the long run, they will get a positive net profit. Losses are a part of the process, and if you manage your money accurately you can trade without worrying.
But before they start trading consciously, beginners most often suffer the following stages of psychologic forging. Professional psychologists single out 4 stages that the trader goes through fighting the market and themselves.
1 stage — Denial
The trader denies their fault, soothing themselves. They take the responsibility for a poorly chosen moment of the trade-off themselves and put it on someone else, instead of analyzing the reason for the loss. The trader closes their eyes at the misfortune and goes on as before.
Stage 2 — Rationalization
At this stage, the trader does not just calm themselves down but starts analyzing, inventing a strategy, looking for some points that need optimization in order to avoid future losses. The trader realizes that their strategy did not turn out as successful as had been expected.
Stage 3 — Depression
After the long and fruitless analysis follows the most dangerous stage, which is depression. It is so unsafe because the trader is, like, wandering in a dark labyrinth. It seems to them that they have already revised the strategy but have failed to find the weak spot. They lose their spirits, sleep, and appetite, which means the trader is close to depression. They just cannot cope with the presence of an invisible mistake. They accept their failure and feel sad, distracting themselves by other things. The best strategy here is to have one or two sad days, have some fun, and go back to the market. The key point here is not to let yourself shrink into the depth of the depression, otherwise, your trading and psychological health will be deteriorated.
Stage 4 — Acceptance
Acceptance of a loss as a failure is the immediate result of deep depression. The trader becomes sure that they are unable to change the situation and the result. They resign with their alleged incompatibility with trading and make their mind to turn to something else. This is the moment when your inner trader dies.
In reality, there are just two ways out of this hard situation:
- The first way is to resign, to assure yourself of your bad luck, and to give up trading.
- The second way is to go on trading. This is the way of strong people as it is not at all easy to go through more and more failures before any result appears. However, any affair that you do not leave at the first failure will eventually yield a result.
The best winning option is to go on without stopping. You should just realize that you can always win back what you have lost and that success is yet to come. Instead of forgetting and hiding your mistakes you should improve your strategy and move on.
How to reduce your losses?
The Grail and a 100% profit remain just a dream because even in the longest series of good days comes a moment for losses. Some people suffer a shock, they try to play the loss back, and, as a result, they waste their whole deposit. At the same time, others remain calm and cope with the losses successfully. You are well on your to a professional Forex trader if you are ready to consciously accept your losses as a usual thing. However, just being calm about your losses is not enough, you need to optimize and minimize them.
3 ways to reduce your losses:
1. Reduce the number of losses
What we mean is not to return your lost money but to reduce the number of losing trades. To do so, it is super important to follow the rules of your trading system and money management as well as to avoid entering the market without a reliable signal. If you follow the rules accurately your losses will not become a disaster for your capital or become a psychological burden. You will be able to accept them calmly and go on trading.
2. Reduce the size of your losses
In many cases, major losses are connected with the inability of the trader to control their emotions, to react reasonably at the situation, or to stop in time. In the case of a large loss, such a trader decides to avenge the market instead of locking in losses and making a pause. And the trader starts opening trades, again and again, led by emotions instead of hood reason. In most cases, the whole deposit is eventually wasted.
So, after a losing trade, you should avoid re-entering the market at once or increasing the lot size. Open trades only when you are calm.
3. Avoid excessive self-analysis
Stop wailing and ask yourself some questions: what mistakes have I made? What should I have done instead? Only if you ask the right questions you will get the right answers.
Also, the trader should revise their reaction to losses. The real danger here is not the size of the losses but the attitude to them. It is important to realize that the loss has happened, and nothing can be done with it. All that the trader should do is to lock in the results of the trade and analyze the reasons for the failure.
How to cope with negative emotions?
Coping with negative emotions includes control over your breath, breathing exercise, and physical exercise. Close your eyes and start breathing steadily, deeply, and long. With time, you will get calm and cope with the stress, while the urge to return to the market and play your losses back will vanish.
Apart from the above mentioned, you should have a strategy that can help you deal with a stressful situation. With such, you will be able not only to stop in time but also come to the right conclusion about what has happened.
Try to assess your emotional state from 1 to 10, or ask someone to do it, which is even better. Then, find out the reasons for the losing trade and define the ways that will help you avoid major losses in the future. And do not forget your discipline and your trading plan for without them your efforts will be lost in vain.
3 rules of turning your losing trades into profitable ones
- Even if you have closed a trade with a loss, look at your trading positively. Success is yet to come, so do not drop your hands.
- If a trade seems bad to you, close it and go have a rest. Reduce your loss as much as possible. You are definitely able to calculate the lot size correctly and influence the result.
- Remember the importance of recuperation after suffering a loss. Do not rush back to the market to regain your money. Calm down, look at the situation soberly, make the right conclusion, and go back to the market.
Good luck with trading!