How to deal with a large trading loss
Once in a while, a trader will have to deal with a big loss. It's part of the business and a good trader knows how to manage this situation emotionally and financially. In this post, I share a few tips I use to deal with this issue.
First, let's be clear that trading losses are part of the business, even large ones. When dealing with a large loss, you must ask yourself whether this loss was caused by not following your rules or by unforeseen market conditions. Here is an example of not following your rules.
I was once trading JNJ and a large offer was sitting at $40.00. When buyers lifted that offer, I jumped in, only to see another offer bigger than the previous one at the same price. I should have exited immediately along with all buyers that panicked. I stayed costing me nearly $2k. I entered following my rules but broke them when I exited the trade. The financial loss hurts, but what hurts more is knowing that I didn't follow my rules. Repeating this type of discipline mistake can break trading careers.
Another time, I was long some stock and my internet went down. When it came back up, I was down my entire week. This is an example of an unforeseen event that can happen to anyone.
What happens to your brain when you have a large trading loss
You are upset of course, your cortisol (stress hormone) is high, your adrenaline levels are high and you are chemically out of balance. Trading is already hard. Under these conditions is even harder and never a good idea. Your mind is simply not clear and time away from the screen is the best antidote to prevent deeper losses.
Tips to overcome a large trading loss
If the loss wipes your daily net average, you can make that back in a day statistically speaking. A break of a few hours is enough to get your brain back in the game.
If the loss wipes more than a week's gain, take the remainder of the day off. Perhaps even the next day too. When you start trading again, trade small. Get back in the game slowly to get your confidence levels back to normal. You can even start back in the simulator until you feel confident to trade with real money again.
Sometimes, you incur too many small losses that when summed up, become a large one. In this case, your strategy may not be working in the current market conditions and a long break from trading is a good strategy to cut your losses short and rethink your trading strategy.
I've seen terrible things happening to traders that don't follow these rules. Typically, their losses widens due to poor trading decisions or revenge trading. Avoid trading during these tough times. As you may have heard a thousand times, the market will always be there to give you new opportunities to make your money back.