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.