How do I deal with trade losses and when do I get back into the market?
One of the toughest things that traders have to deal with is handling their emotions after losses.
I am sure many traders over the last week have experienced some pressure in their trading account with the large market moves in both directions.
Processing that mentally and emotionally as well as deciding how and when to get back into trading is something you must learn to be successful in your trading business.
Everyone Has Winners And Losers
The first thing you must realize is everyone has winners and losers no matter how good they are at trading. It’s important, in the heat of the moment to try and limit those losses, but sometimes there are inevitable.
One of the best ways to get over trading losses is to get back into the market once it settles down and trade smaller. Perhaps waiting for a day or two when the market has not moved a standard of deviation.
You can also change up the way your trading style, for example, if you were trading non-directionally maybe do some spreads that are directional.
Trade Directionally
Also selling puts on beaten-down stocks that you would like to own is another way to trade directionally, but with more safety. With those though it’s probably best to sell put spreads, so if the market does continue to move against you, you have some protection.
When the market begins to trade more peacefully and you put on non-directional spreads be sure to add far out of the money puts and calls for protection.
Trading Small
As you get back into trading, I can’t emphasize enough the importance of trading smaller. Also, you must not over trade. Put on one or two positions and work your way up as you become more successful.
This will greatly restore your confidence and comfort level with your trading business. As always have a solid plan for when you are getting in and when you were getting out whether at profit or loss so that you don’t freeze when a trade goes against you or get too greedy when a trade is working well for you.
Capital preservation is key especially after some very tough losses.
– Mark Fenton of Sheridan Mentoring
Hey Mark,
I completely agree with you, except for one part where you said “You can also change up the way your trading style”. If your trading style worked for you and you are comfortable there, wouldn’t a big trading loss (Like I too suffered this month) move you to get back to basics and more diligent with what worked instead of getting more creative to dig yourself into a deeper hole?
I will also add, how I get over trading losses is I make sure after I have calmed down that I study the bad trade and see what lessons are there to be learned. Be it emotional, trade mechanics, perhaps something I don’t know with the underlying, or the mechanics of the options themselves like usual spread or execution. I have a Lessons Learned document that I keep when I have a trading loss. Then at least in the end I feel like even though I lost money, I paid for the lesson… so all is not lost. If I have three straight bad trades where I can’t identify a lesson, it is time to take a break for a week or two. If I have three such breaks within a year, then I look for a different strategy because obviously the one I was utilizing wasn’t working consistently. That’s how I came to Sheridan Mentoring in the first place! It is my 4th trading strategy, actually… but so far the one I like best.
–Jay