Making a loss is - unfortunately - an unavoidable part of trading, and it can be incredibly disheartening. So - how can you deal with loss and turn it into a learning experience?
As long as you follow these three key steps, you can learn from your mistakes.
1. Keep calm after the trade and monitor your mindset
This is the first step in the moments after the trade has been placed, and you’ve seen that you have made a loss. It’s crucial to stay calm: panic might cause you to place more trades quickly in the hope of making your money back - but you’re more likely to lose more this way.
Losses are an inherent part of trading - but it’s how you deal with them that counts. The key to this is keeping as calm as possible, and taking a step back to reassess and re-consult your trading plan.
After this step, which focuses more on your emotions after the trade, the next step is to analyse your mindset during the trade.
Read more on Trading Psychology here.
It’s a good idea to look at what was happening around the trade and how you felt. Did the market move completely unexpectedly? Or was there something in particular that caused you to make the trade? Were you feeling particularly impatient? Did you rush into it without waiting for price action confirmation?
Make sure you’ve fully analysed how you were feeling before making the trade, so that if you identify some key issues - say you rushed into the trade, for example - you can make a note to keep an eye out for this mistake next time.
After examining your mindset, the next step is to examine your trading plan.
2. Consult your trading plan
Did the trading plan hold up? If you’re relatively new to trading, it might be that your trading plan will need some tweaking before it works effectively, so it’s a good idea to keep analysing it to monitor your performance. A good trading plan should respond to the market and should be something you can follow in all trades, but can be altered accordingly.
In light of making a loss, then, it’s a good idea to reassess your trading plan to see if it can be improved. For example:
- Did you place your stop loss too low?
- Did you set your profit targets too high?
- Did you exit the trade too late?
- Do you enter the trade too late?
- Did you risk too much of your portfolio on one trade?
- Was the risk:reward ratio slightly off?
- Was your fundamental analysis not thorough enough?
- Was your technical analysis not thorough enough?
- Does your plan focus too strongly on buying signals without taking exit signals into consideration?
- Did you wait for price action confirmation before making the trade?
- Did you draw support and resistance levels correctly?
These are some good ways to identify the problem so that you can learn for the next time, and create a better, more robust trading plan.
This is the crucial last step. After you have reassessed your trading plan and tweaked it accordingly, it’s time to dive back in!
Traders who experience the most success are often those that repeatedly made losses before making profit - and the key is perseverance. After each loss, go through these four steps and you should reap the rewards soon.
Want more tips on how to navigate trading loss? Each of these traders made a loss before they began to consistently make profit.
Read the experiences of Angela, Ivan, Kyle and Ross on our Trading Success Stories blog.