Two weeks ago, I wrote about what Roger Federer can teach you about accepting losing trades. Last week, I wrote about what to do when you have a winning trade. Now let’s talk about how to handle trading losses, because all these lessons work together.
Let’s review the previous two lessons first.
Roger Federer is among the winningest tennis players ever. But you know what? He only won slightly more than half the points he played. He didn’t win 100% of the points, or even 80% of the points. No, he won just over 50% and that’s all he needed to win 20 Grand Slam tournaments.
The same is true in trading. You only need to post a few more wins than losses to grow your wealth.
Now let’s look at what to do when you have a winning trade. When you have a winner on your hands, it’s tempting to hold onto it. Why not make some more money, right? Wrong. Always sell when you have a profit. Eventually, the tide will turn and you could end up losing all those profits and more.
How to handle trading losses
Though we know that trading is not a game of perfect, watching a trade go south feels terrible. And if you’ve been on a nice winning streak, it can make you doubt your abilities as a trader.
Recognize that your trade is a loser and then sell it. Don’t hold onto it in the hope that it will turn around quickly! That’s your ego talking. Your ego is the one thing that gets in the way of doing the right (most practical) thing, which is to cut the loser before it becomes even larger.
Losing money stinks, but losing your mental capital is worse. How much of a drain on your mind is it to sit there and stare at a loser day after day? A loser in your portfolio eventually becomes a distraction that makes you incapable of making high quality trades when the time is right. Opportunities do not come calling for you. You have to be ready for them, perhaps getting lucky. Remember our definition of luck? It’s where preparation meets opportunity.
We will all have losing trades, it’s just part of the game. Learning how to handle trading losses is tough. But once you are quick to shed losers from your portfolio, you’ll be in a better place and ready to make that next trade – which may be a nice winner!
