In trading, real damage can occur after a loss when a trader cannot recognize that having some losses is part of the game and they tend to beat themselves up, developing a negative attitude, losing self-confidence and finally going into a state of depression. The more trade losses you encounter, the more frustrating it becomes and it is then easy to lose mental focus and confidence.
One thing that separates the ultra-performance traders from novice traders is how they deal with setbacks and losses. Every trader makes mistakes. Some traders get discouraged and defeated by them. Winners learn from them.
Traders must understand that they can’t always control what takes place in markets. Things don’t always go the way we’d like regardless of how well we have prepared. Ultra-performance traders focus on what they can control, not on the “what ifs” or the “if only”. Being able to choose how one responds to an unwelcome event is a critical skill to have.
Top performance traders know that nobody wins all the time. Not in life, not in trading. When things don’t go their way, they know it’s OK to be disappointed. What’s not OK is dwelling on the disappointment. Professional traders keep it in perspective. They are able to accept responsibility and recognize the situation as a temporary setback nothing more, nothing less. Yes unquestionably it hurts, so they look at it, learn from it, and then let it go.
Remember that high performance traders never play the blame game. They pick themselves up and start working on what’s coming up next. They hold their heads high, even when that isn’t easy to do. They push themselves to move forward. They never forget that if you don’t fail sometimes, then you probably aren’t challenging yourself at a high enough level.
Except the psychology game which is crucial in order to deal with losses and frustration, trading performance also depends on Risk and Money Management. If we think calmly we will realize that as soon as the trigger is pulled (by opening a trading position) the only one thing that dependent on us is the risk management (how we manage our money). If for example 75% of your trading ideas are correct you can still have losses if your risk management is poor. On the other hand if only the 50% of your trading ideas are wrong you can close your trades with profits if your risk management is good enough.
Some key points in order to have a successful risk management:
- Never add to a losing position
- Each trade it should never exceed the 3% of your total capital. For instance if your total trading account is $5000, you never lose more than $150 for each single trade you get.
- As soon as you are profitable in your trade you close 1/3 of your position and, move your stop loss in order to secure further gains
- Always put stop loss as soon as some breaking news for a possible terror attack for example can blow up your account
It is very important for every trader to acknowledge that Risk management is the backbone of successful trading. Trading without proper risk management is like participating in a random game where the probabilities of success are against you.