Losses in stock trading are an unfortunate, though an essential part of the game. Nobody likes to lose money in life! But it is impossible to become a good trader without incurring any losses. In fact, managing losses are an essential part of a trader’s journey which can propel him/her from a novice to a professional trader. There are many ways in which a trader can recover from a trading loss with minimal damage to their trading account. Let’s take a quick look before diving into the details.
- Understand that losses are part of the game
- Start small
- Never revenge trade
- Turn off your screen on a bad day
- Don’t give up on a proven strategy
- Improve your strategy
- Review your trades
- Reduce your risk
- Start fresh again
Understand that losses are part of the game
Every single trade which you take has only a certain probability of succeeding. There is not a single trader in the world who can make money in every trade which they take. In fact, it is not the goal of trading to make money in every single trade. Trading is a simple game which you play with the market. If you win, you win big & if you lose, you lose small. This is how you make money in the market. So, the first step of dealing with losses in trading is to understand that losses are extremely common in the day to day life of a trader. Trader’s goal should be to minimise losses, not eliminate them.
To learn more about the mindset of a successful stock trader, visit this article – How to develop a stock trader’s mindset?
Start small
Starting small is the most important advice for a new trader. It doesn’t matter how much money you have, if you start stock trading with a big capital you can face disastrous losses! If you have a total capital of Rs. 10 Lakhs, only use 1.5-2.5 Lakhs for stock trading. This is important in the learning phase for a stock trader. The journey of a stock trader starts with multiple losses during the learning phase. The smaller you can make your initial losses, the better! Small losses are not only better for learning but also important to stay focused in the trading game.
If Rs. 5000 is a big loss for you per trade, then your trading position is too big. Imagine what will happen if you hit 3 stop-losses in a row on the same day (and believe me, they do happen). Your heart may not be strong enough to take a loss of Rs. 15,000 on a single day! However, if you lower your quantity from Rs. 5000 to Rs. 500, you will be much more comfortable in staying focused in stock trading even if you hit multiple stop-losses in the same day.
If you are not aware of why stop-losses should be used while trading stocks, visit this article!
Never revenge trade
Revenge trading refers to the trades which a trader enters with the sole focus of recovering his/her money from the market! This is one of the biggest mistakes which a trader can make in stock trading. To learn about the mistakes which a trader can make during stock trading, you can watch our video on the same on YouTube!
Revenge trading is generally the result of consecutive losses which a trader takes. During the emotional rush which the trader faces, he/she forgets all about his/her discipline & just jumps into the next stock with the aim of recovering the money. Always remember, it is not possible to recover your money from the stock market. Instead, you can only make new money in the market. The easiest method to avoid revenge trading begins with our next point.
Turn off your screen on a bad day
If the markets are not obliging to your style of trading on a certain day, turn off your computer screen & take the day off. Not every day will be your day in stock trading. Your style of trading WILL have good days & bad days. Your goal is not to turn bad days into a nightmare & undo all the good work which you have done on the good days!
A bad day can put immense stress on new traders which makes them prone to making mistakes. Even if you don’t try to revenge trade & follow your discipline, you could end up making tiny mistakes due to the stress from losses. In trading, every single mistake counts & can take you from a profitable trader to a losing trader. So, take some days off!
Don’t give up on a proven strategy
This happens all the time to new traders. They are enthusiastic about their trading style but then they are hit with consecutive stop-losses which stops all their momentum. It is during these times, a trader is faced with multiple questions –
- Has my strategy stopped working?
- Am I missing out something?
- Is there a better strategy out there?
If you are trading using a proven strategy & understand the markets well, then there is no need to panic after a few losses. The worst thing which you can do is to completely throw away your strategy & switch to something completely new. There is a much better thing which you can do & this brings us to our next point!
Improve your strategy
Rather than completely giving up your strategy, your focus should be on perfecting your strategy. It doesn’t matter which style you trade – trend trading, momentum trading, reversal trading, VWAP trading or any other strategy, you can always improve upon your existing strategy. Adapting your strategy according to the market condition & understanding the strengths & weaknesses of your strategy will help you in improving your win-rate in trading thereby increasing your profits. If you want to learn more about improving your win-rate in stock trading, visit this article!
The best traders make money in the market by perfecting one or two of their strategies, not by learning 20 different strategies!
Review your trades
Reviewing your old trades is an essential part of improving your trading strategy. You might be surprised to find out that the trades which you take in the heat of the moment during a trading day might look very different during the weekends when you are completely calm. You might even figure out the mistakes which you committed due to the pressure of missing out on trades. The more mistakes you can figure out, the better! Constantly monitoring your trades & learning from them is the best method by which you can perfect your trading strategy.
Reduce your risk
When you are down on your confidence, take smaller risks. This is the mantra of regaining your confidence in stock trading. There will be times where you cannot take a good trade no matter how hard you try (choppy market conditions, market unfavourable to your trading style, mistakes from your side or just bad luck). If you are not able to take any good trade for whatever reason, just reduce the capital which you are risking in every single trade. This will help you in easing out the worry of losing even more money & will put you on the right path of recovery of your trading account (Remember – recovery is not done through revenge trading).
If you take a risk of Rs. 5000 per trade, reduce your risk to Rs. 3000 or Rs. 2500. This is not a permanent change. This reduction in risk is being done only to gain your confidence back in trading. Once you regain your confidence back & figure out that your strategy is working again, you can go back to your original risk of Rs. 5000. (These risk numbers are just an example, not a recommendation!)
Start fresh again
So, you have reviewed your trades, improved your trading strategy & reduced your risk. Now what? Now you can start your next trading day with a fresh start & refocus your energy on performing your best trades. Making the most money is not the objective of stock trading, rather the focus should be on taking the best possible trades. A fresh start will clear your head & help you in taking the best trades possible. What happens when you only take the best possible trades? You make a lot of money trading! Focus your complete energy on finding the best trades & the money shall follow soon.
Conclusion
Losses in stock trading are very common & should not be taken as a failure. When the losses are taken with the right spirit, they can teach you much more than you win ever will! A professional trader always reduces (not eliminate) his/her risk as much as possible to make money in the market. A trader can follow all of these points to deal with trading losses. However, the final decision on trading depends entirely upon the reader!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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