We generally think of losses as a single event- losing money. So, we try to reduce it as much as we can by sticking to a plan. Even then, we make beginner mistakes once in a while. People try to AVOID losses instead of developing a sound strategy to deal with them. :annoyed:
" To conquer an enemy you must first completely know everything about that enemy. "
There are 5 different types of losses based on the situation. I follow this guide and react differently to each one of them.
1) Profit turned to losses: 1a) Large profit slowly turning into loss -giving back a chunk of profit to the market. Yes, it's a loss in my opinion
1b) Average profit turning into loss - market comes nearer to your profit goal and then goes back downwards.
2) Neutral turned to losses:2a) Market stays almost neutral and suddenly moves against you in one large candle.
3) Losses turned to bigger losses3a) unable to take small loss mentally when SL hit - generally retaliation trade or waiting for it to recover
3b) Unable to take GENUINE loss - For example, staying in the trade after you see a reversal pattern.
These are the 5 different types of losses. I believe that categorizing them and mentally preparing how you react for each situation before the trading day begins will help A LOT while dealing with losses. Atleast, it did for me.
EXTRA READING: My personal system is roughly as follows.
1a) Happens when I'm greedy. So, I take whatever that's left of the profit and fix my mindset. I might even take the day off if this happens frequently. It's better to take whatever's left and move on instead of staying in the trade and completely ruining your mental stability. Home runs don't happen every day.
1b) This generally happens because of no personal mistake of mine. What can I do when trade doesn't hit my profit mark? I have two choices, I can either take the scraps or wait. I take the scraps and move on because the market isn't behaving as I predicted it would. Staying in might be a disaster. I always stay out when I'm unsure because I learned it the hard way:lol:. Sometimes you might get out early and miss the profits. But is it worth staying in a market you're unsure about? That's your choice to make. I prefer to miss this opportunity (if it does happen) and move on instead of staying in.
2a) **** happens. I cannot do anything. Categorizing it as a neutral loss keeps my emotions in check so I just do it.
3a) This is the hardest type of loss. This loss ONLY happens in two cases, when you're i)greedy(market might turn) ii)fearful(no idea what's happening so you can't make a decision to close)
Best way , according to me is to setup two different losses - 1) mental stop loss 2) physical stop loss. Once it hits your mental stop loss, you take a step back and analyze your current situation. If I'm incapable of analyzing due to greed or fear, then it will hit the physical SL and I stay out. Your mental stoploss can be very small- it doesn't matter because it's main purpose is to help you make a habit of re-analyzing your trade whenever it starts going against you.
If I find myself moving SL then I will take few days off from trading. Generally it's a mindset issue.
3b) **** happens. Professional traders sometimes make these mistakes. There's no solution to this other then categorizing it and moving on. For example, you went long after looking at previous candle and suddenly the current one made an engulfment...what can I do? Nothing.
So, I take the loss and get out because this might be an opportunity for a reverse trade.
