This is one of the most frequently asked questions, especially from new(er) traders who have not overcome the challenges of controlling trading emotions.
Losing, unfortunately, is a part of trading. Anybody who claims to never have lost a trade is probably telling you a fairy tale, has taken creative license by disclosing a very short time period, or has multiple accounts and “cherry-picks” the one account with no losses. You’d be surprised at the claims of those looking for trading capital (your money), offering you a sweet, sweet deal.
Back to the topic question. What should you do if you’re losing money…short answer; it depends.
Longer answer…
Losses can manifest as different organisms. The occasional loss is perfectly acceptable. We cannot control the market. There are times when all of your signals indicate “go time” and, for whatever reason, price immediately reverses and stops your position for a loss. Did the market see you (and only you) coming and decide, “I’m gonna mess with this trader and whipsaw him/her out of their trade”? Not bloody likely, my friend. We, as retail traders, make up a minority share of the market and your five mini lots, 5 full lots, or even a somewhat larger fifty full lot trade would create the same effect as tossing a pebble into the ocean; no reaction.
Streaks Happen
Another kind of losing takes a little closer look. When you get three losing trades in a row, we classify that as a “losing streak” which may indicate a systemic issue with your system; or not, since the market is going to do what it does. Conversely, do you ever question the market when you get three winning trades in a row?
Markets trend and range. Volume and volatility play a large part in the game. Does that mean you immediately stop trading? No, you don’t. A pair that can’t seem to find a trend is normal. That’s why we trade across many pairs. All, at some time, will trend, and some will range. Take the signals across those pairs as they present themselves.
However, is it a good idea to examine your system from time to time? Absolutely! Never sit back on your heels and imagine that for one moment you have discovered, developed or invented the holy grail of systems. This is what we mean when we exclaim that you must “be relentless”. Always pursue, research, and test new indicators, settings, and combinations of indicators in an effort to refine and improve your algorithm.
Drawdown
If your system continues to kick back losing trades where you experience a drawdown of 10% of your account, then stop live trading for a moment. You need to take a step back and figure out why. Does your system need to be adjusted? Is your favorite pair just not able to settle into a solid trend? Consider reducing your risk from 2% to 1% until you begin to see an uptrend in your win/loss rate. Remember, while profit is the name of the game, capital preservation play a close second because without capital, the game is already lost.
Statistically Speaking
The degree of winning Forex traders is very small. Sources have placed it at 4%-10%, some 1% (or less). Whatever the number, most will lose money and generally end up quitting for a number of reasons. We’ll take a quick look into some reasons why traders lose at Forex. Some of you may be guilty of one, more, or all of these reasons. Make no mistake, even the most seasoned trader has sinned on occasion. The trick is to learn something from your mistakes. An excellent definition of insanity from Albert Einstein is; “Insanity is doing the same thing over and over and expecting different results.”
Won’t You Be My Neighbor
The trend is your friend, but never imagine trying to befriend the market. Many newer traders try to beat the market, making it personal and seeking vengeance, especially after losing a trade. Most often this affects under capitalized traders who try to shake too much out of the market, too soon. Over leveraged trades, counter trend trades, betting the farm, doubling up, hitting for the fences, pick your metaphor. It comes down to not having a smart risk profile, money management and subjecting yourself to a host of emotions.
‘Mo Money
Focusing on under capitalization, many new traders believe that high leverage is their golden ticket to easy money or reducing debt. Sneaky brokers who offer excessive leverage of 500:1 and higher love these kinds of traders who place large sized positions and then blow up their accounts…only to ante up with more capital because now they’re desperate to get back what they’ve lost. It’s a horrible cycle.
Capital Preservation
Managing risk will keep you alive to come back another day to trade. Capital preservation is the name of the game by protecting what you have. Without a smart risk profile, it’s only a matter of (short) time before depleting your capital removes the ability to make a profit. This leads to a dangerous emotional state with each directional price change of the market and subsequent jumping in and out at the worst possible times.
I Expected More From You
And the final reason (there are more) we’ll discuss here is the unrealistic expectation traders have in the Forex market. Many times, we’ve heard about or spoken to traders who have been told that escaping whatever financial crises they are currently experiencing can easily be achieved by trading Forex. Technically speaking, trading is not that difficult. Practically everybody is capable of performing the required steps, but the underlying motivations which cause the obstacles prevents success in many.
There are a host of other mistakes that are committed by traders including cost averaging, not following your own rules, over trading, relying too much on recommendations from others, less than honest brokers, and not practicing on a demo account for a sufficient amount of time. We’ll examine some of these mistakes in future blogs in greater detail.
You Got This
Trading is a long game venture with success and challenges along the way. With a proven algorithm, the net gain from your system will far eclipse your losses over time. Losses are part of the game, and accepting losses will help you overcome the emotional baggage that weighs you down. Treat each trade as a business transaction, keep a trading log (you keep one of those, right?) and take the time to examine why the trade ended up a loser. It is a constant learning process, and you can only get better. And as always…be relentless.
More Headed Your Way
Just remember, losses are a part of trading. Embrace and LEARN from the experience. In fact, losses are the strongest catalyst keeping you coming back with the motivation to do better. We wrote another blog how losses can affect your account (through the mathematics lens) and is worth reading to gain a better perspective. Trading Losses – How Much is too Much
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BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments. It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.