Saturday, March 20, 2010

How to Overcome Large Trading Losses

A while back I wrote about the worst loss that I ever suffered in financial markets and how I handled that very difficult setback. Recently I've heard from several traders who have experienced something similar: having built up their accounts over time, they lost much of their profits in a short period of time.

In the wake of my large loss, there were three steps I took that were very helpful:

1) I stopped trading. I took the time to process what had happened, figure out what I had done wrong, and make radical changes in my approach to markets. When I returned to the markets, it was as a very different trader;

2) I refocused. I used the time away from trading to work on other aspects of my life and career. In doing that, I remained opportunity-focused and not regret-focused. I also stayed focused on what I could control, not on what I couldn't;

3) I used the incident as motivation. The loss was so painful that I made sure that I would never go through such an episode again. I created a new balance between trading and the rest of my life so that I would never be dependent upon trading results for my happiness and fulfillment.

All three of these steps would not have been effective if I had not first taken a different step: I took ownership for the loss. I realized that I was wrong, that I had taken too much risk, and that I was employing trading methods that did not work. I didn't blame outside "manipulators" of markets or bad luck; I accepted that I had completely and utterly made a hash of things.

Initially that was depressing, and initially I did not handle my depressed feelings well. But that was better than brushing the episode aside and continuing to lose money in a state of denial. Depressed feelings are a normal response to loss: the loss of money, the loss of dreams. Sometimes you have to go through that loss before you can come out the other side as a different person, one who has learned from the experience.

My earlier post pretty well lays out how I managed to learn from my loss. We can find opportunity in a losing trade, and we can sometimes learn from losing, good trades. Trading teaches us how to lose: those principles extend to life itself. Sometimes in life you have to make large bets when the odds are with you, but only when you have enormous potential upside--and only when losing those bets will still allow you to make similar, high-odds bets again.


JackAz said...

Wow, what an encouraging (and familiar!) post. Last year I blew up my trading account. Entirely, utterly and completely my own fault. Terribly painful loss. In retrospect, it was inevitable because of the way I was trading. I took several months away from trading to get my head together. I reviewed everything I did, everything I believed and am now in the process of revamping myself as a trader.

I really wish I didn't have to go through that experience, but I am a different (and I think better) person because of it. I am not yet trading again, but that is because I am still doing the Hard Work of making myself a professional, disciplined trader versus a seat-of-the-pants trader.

Thanks for this post.

Steve Willette said...

Once again, I appreciate your posts for weekend reading. After I loose big on a trade, I always ponder if trading is for me.

The best thing I do is to stop trading for the day or for several days. The time off helps me forget the loss and reflect on my training and the things I do right when I trade.

blackmarkt said...

Thank you so much Dr. It is comforting to hear about the on-going struggles of active trading from other traders. This post only reinforces the absolute importance for proper risk discipline in every trade every day.

M said...

Maybe I should be swing trading or buy and holding futures. I made up Friday's losses (2/3rds of my yearly profits) when I went long Friday afternoon, held it through Sunday night/Monday morning's mini-slaughter, and rode it up, taking off half of my two TF contracts within one tick of the day's high. I get too emotional when scalping for ticks. If I were short term scalping, I would have sold at the lows, even put on a short as the massive short squeeze and buying happened. Looking back at the charts, if I had bought let's say conservatively, at the 50 percent correction from the January highs to February lows on the way up, not catching a falling knife, and held until today, my profits would be twice as they are from intraday scalping.