All traders will have losing trades.
As you’ll know from my risk management video, one can still have a profitable trading career even if not every trade is a winner.
However, exacerbating the beating one’s account balance takes after a losing trade is a very easy thing to do.
I’ll share with you a list of some of the worst things to do after a losing trade.
These are mostly sourced from my trading journal and thus are based on real trading examples.
Thank you to DonAlt for the help.
The moment you lose a trade and see some of your equity vanish is probably one of your most emotional and irrational times as a trader.
I can imagine very few (read: zero) reasonable risk management protocols which mandate that upon losing a trade, the trader must 1) enter another position virtually immediately; and 2) do so with double the previous risk.
A losing trade is no excuse to throw your risk management system out of the window because you feel that the market ‘owes you’ a winner.
This is especially the case if you’re getting your arse handed to you (in the form of consistent losers) and you lead yourself to believe that the market, having taken so much from you, must turn around.
That’s the Gambler’s Fallacy and that mindset makes it pretty easy to nuke your trading account.
Take Another Trade Immediately
The most natural and tempting thing to do after being taken out of the market is to get back in.
In most cases, it’s a terrible idea.
I strongly recommend you do something non-trading-related after a losing trade, even if it’s a very small task for a minute or two.
Go fix yourself a drink, stretch, listen to your favourite song, send a message to the friends and family you’ve been neglecting, and so on.
There’s a good chance you’ll come back with a clearer head ready to execute your plan.
Now that you’re out of a position, take a moment to reassess the market. Have market conditions shifted? What structure has the market come into/from? Has price reclaimed any important levels? Has your previous bias been invalidated, and if so, has a new trade presented itself/likely to present itself?
In other words, there’s a good chance that if you’ve been stopped out, the market has moved a fair bit and moved in the direction you weren’t expecting. This deserves your attention and objective reassessment of the facts, as opposed to flying headfirst into another position just seconds later.
Assume You Erred on Direction/Immediately Flip Bias
It’s intuitive to assume that if one gets stopped out of a long, that price is more bearish than anticipated/if one gets stopped out a short, that price is more bullish than anticipated.
As nice and rosy as that may sound, it doesn’t stand up to much logical scrutiny.
There could be a host of other explanations: your stop was too tight, your stop was placed at a turning point (very common mistake), your stop was arbitrarily placed at a level that’s not technically or structurally significant, and so on.
In short: just because you were stopped out of a trade doesn’t mean you’re wrong on the general price direction, it could be shitty/arbitrary stop placement or simply bad luck.
Once you’re out of the position, try to look at things objectively. How has price moved since taking my stop? Has it continued in the expected direction or has there been a strong move in the opposite direction? Did price close through the key levels/structures that I was using to define my risk, or does this just look like a deep test of a level/structure?
Don’t treat a stop out as an automatically valid reason to flip your bias. You could still be right. Reassess, look at the market, and decide your next trade based on that recent information, not arbitrarily on the fact that you’ve been stopped out.
What you’ll discover is that some of the best trades will take you out or squeeze you first before moving in the expected direction. Knowing how to get back in the market in the same direction despite being stopped out is an invaluable skill.
Suck it up, buttercup.
Losers are an inevitable part of trading.
Unless your system specifically prescribes you to stop for the session/day/week/forever, or the risk manager has called the police because you’ve barricaded yourself in the office, a single losing trade shouldn’t make you quit.
If you’re not in the right mental state after a losing trade and are unable to cope with losses psychologically, reduce your risk per trade (for a start).
Let’s say you start off the day at 08:00 UTC and your first trade is a loser. You’re -1R for that day, and feel a bit shitty. Nothing else catches your eye for a few hours. New York opens, and you still feel a bit bummed out. You scroll through the charts and an excellent setup has formed. It meets all the rules of your trading system and your journal tells you it has a positive expectancy. You should be taking that trade every time, despite losing earlier in the day.
A couple/few losing trades should not stop you from executing trade setups that have a positive expectancy.
You’re still going to trade sooner or later. You can either pull the trigger on a setup that you recognise and has worked for you in the past, or you can FOMO into some stupid shit later once you stop feeling sorry for yourself. The choice should be clear.
Stop Trading the Losing Setup
This is a classic!
A good setup doesn’t need to have a 100% win rate (or anything close) to be worth trading.
Some characteristics I look for in a setup are: frequent enough to offer enough trading opportunities, clearly identifiable/reasonably unambiguous so after a quick scan I know if it’s there or not, and also allows for replicable, logical, and reasonable risk definition.
Once those are roughly met, I’ll (loosely) backtest and study the setup. Then I’ll start risking smaller amounts (1/4–1/2 size) while collecting data. Over time, that’ll tell me the expectancy of the setup and that, along with the aforementioned factors, decides if the setup makes it into my trading system.
Positive expectancy (arithmetic aside) simply means that over enough trades, executing this setup will make money.
There’s nothing about a 100% win rate there. Nothing close.
The key part of that definition is “over enough trades”.
If you pull the plug on a setup with a positive expectancy (collated from dozens/hundreds of data points) based on a handful of losing trades, that decision is an emotional one, not an empirical one.
That is not to say that certain setups can’t stop working (though that has been rare in my experience). However, if you’re going to make significant changes to how you trade, surely you’d want the weight of the evidence and data on your side as opposed to arriving at the decision via a couple of shoddy trades.
Put simply: don’t let your emotions lead to the removal of a perfectly valid and functional trade setup that makes you money in the long run just because you’ve taken a few slaps on the wrist from the market.
Tell Yourself You Must ‘Make it (All) Back’
Losers are losers. Note them down, see if you missed anything, make a note of what you could’ve done better (if anything), and move on.
You can do everything correctly and execute perfectly in accordance with a demonstrably profitable trading system, and still get stopped out in the same candle that filled your order.
Do not make silly excuses or try to reallocate the blame.
If you took a trade in accordance with your system, and it didn’t work, you shouldn’t feel bad for executing your plan. If your stats are accurate, repeating that behaviour will make you money in the long term.
If the trade wasn’t in accordance with your system, and it didn’t work, you’re still the dumbass who put the orders in the market. Nobody forced you.
It’s very important that you do not frame your next trade as ‘making up’ for anything.
Rather, view it as a self-standing/independent opportunity to execute your edge in the market you’re trading.
Think about it logically: if you employ a ‘make it back’ mindset, you’re more likely to rush into a sub-optimal setup as you salivate at the ‘opportunity’ to recoup your losses. You barbarian. You just lost money. If anything, you should be making sure that you stick to your rules and take good setups, especially if the losing trade was not a position you should have had in the first place.
In summary, extract what meaningful information you can from a losing trade and leave it at that. It should have no impact on your next trade (unless your rules specifically prescribe otherwise).
Telling yourself that you must or will make back what you lost is likely to lead to shitty trade selection and exacerbated losses.
Thanks for your time.
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