Many traders who post a loss often feel like a complete loser. After all, the future is uncertain – will you ever post another winner again? That is a rhetorical question, of course, but if you plan well, do your due diligence, study, focus, and make your bets accordingly, the odds are good for you.
Psychology can play games on you. Given the massive unknowns we have to deal with, we move along the risk curve from fear to greed. In trading we certainly have our share of gains and losses, and with options trading they are magnified.
When you have a loss – and you will – how do you handle it?
Three words: Maintain risk discipline.
My self worth is not my net worth, so I can stomach a loss and not be rattled (too much!). Do I feel bad when a trade goes against me? I’d be lying to you if I said no. But I don’t feel like a loser, because the next big trade is probably just around the corner.
Like you, I want to win – every time. That’s the goal, but realistically it’s just impossible. So, I remind myself that the odds of success are extremely high as I trade, and they go even higher as I trade more. Given this information, I can either let the Trading Gods take over and take me places (most likely the crowded trader’s graveyard), or I can be in control. I choose the latter.
I know trading losses will happen. It comes with the territory. I recently had a blowup on some PNRA calls – they went down after earnings were reported to a loss. These things happen, more so if you play earnings.
The trick lies in how we deal with and recover from losses – and it separates the pros from the amateurs. I’ve known many traders in my years who feign discipline and just roll the dice. They see the exit door eventually – and not by their choice. On the other hand, some embrace their losses and learn from the experience (always the best teacher). They ask, “What went wrong? How can I improve? Did I size correctly?” Answering those questions helps traders stick around for the long term.
Sizing is the one area that ruins traders – permanently. Too much can be a recipe for disaster, and it only takes one play. They not only lose their capital, but they are so far gone emotionally that their behavior is changed forever. Never again will we see the gunslinger firing away like he’s in the wild west. We’re more likely to find a cautious creature putting some money down on a very conservative play.
Remember: Keep your trades in control and use a disciplined method of risk management – for me it’s 2-3% of capital on a trade – and allow yourself to withstand tough outcomes. As the day is long, you will surely have them.