How To Handle Losses In Trading?

Every trader faces losses in trading. In your entire trading career, if you haven’t faced losses in trading, you still have not experienced the complete cycle of the market.

In this article, I have explained to you how you can face losses in trading and recover them with the right trading process and psychology.

What is a Drawdown in trading?

There is a definite drawdown in any trading strategy. Your account equity curve will fall by a specific percentage for a certain amount of time throughout the drawdown phase. This proportion varies from trader to trader because it depends on a number of variables, including your trading style, strategy, and system.

Drawdown could happen at any time. During the downturn period, you frequently lose money or your stop losses are triggered, which causes you to start questioning your trading strategy. The majority of the time, traders alter their trading strategies at the height of their drop, and in my opinion, this is the worst possible course of action.

So here are some of the pieces of advice that can help you to handle your losses in trading and survive your drawdown.

Advice 1: Understand that losses in trading are unavoidable.

Every system experiences a downturn, as I just mentioned. Drawdowns are unavoidable in your trading career. It is important to realise that drawdowns act as pullbacks in your account equity curve and are necessary for you to reach new highs.

Therefore, it is crucial to understand that if you are going through a drawdown phase, there is no need to be concerned. A successful trader is one who can endure such adverse circumstances and still maintain their composure. One must keep in mind that the stock market will invariably test you by placing you in various trying situations.

Advice 2: Decrease your position sizing!

This is the most practical approach to dealing with a loss in trading. If you are facing losses and continuously losing money, then the first thing you can do is to take a risk-off approach by cutting down your position sizing and losing less money.

Instead of increasing their risk during a loss, a trader should adopt a defensive approach. I frequently observe traders who are in a drawdown period risking more capital to make up for their prior losses, but they wind up losing even more. It is always preferable to take fewer risks and build confidence through tiny successes.

Advice 3: Take frequent breaks from trading

Drawdowns drain your emotional energy. Immediately after a big drawdown, a trader should take some time off from markets and focus on other things like his hobbies and going out.

This instantly stops the account from bleeding and gives you a sense of relief. Once you get a sufficient break, then you can come back and trade in small quantities and regain that confidence.

Advice 4: Stop Revenge trading.

An urge to quickly recover your trading losses leads to revenge trading. Once you start revenge trading during a drawdown, then it is very hard for you to come out of that drawdown because now, you are not following your system.

So, the urge to do revenge trading can further increase your losses. Also, you may start taking unnecessary risks due to revenge trading, which will be very harmful to your account.

So these are the practical ways through which you can face your losses in trading and hopefully recover them with the right process.

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Happy Learning!

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