For traders of any type, one of the most important skills is to adapt to a losing investment, ensuring that it doesn’t affect any future trades. This is of course a lot easier said than done, with the aftermath of a substantial losing investment akin psychologically to dealing with grief. According to Elisabeth Kübler-Ross in her 1969 book, On Death and Dying, there are five stages of grief, which are (a) denial and isolation, (b) anger, (c) bargaining, (d) depression, and (e) acceptance. The quicker the investor sees himself as part of this process, the sooner they can return to trading. Here are some tips as to how to do so:
1) Avoid Denial
Psychologists all agree that lingering for too long in the first stages of grief prevents a person from moving on. As a result, it is essential that an investor accepts responsibility for the losing transaction and does not engage is a lengthy and ultimately fruitless process of blame, rather than accepting responsibility. It’s always your decision, so take ownership and move on.
2) Analyse the Loss
Before going any further, you need to dedicate a little time to analysing why you made the loss in the first place. If the loss occurred because you deviated from your trading plan, it’s important to take a little break from trading to consider why you deviated from your plan and how to ensure that this doesn’t happen again in the future. In previous articles, we’ve stressed the importance of adhering to a plan, and often a loss should focus your attention back on the plan.
On the other hand, if losses occurred whilst implementing a well thought out plan, you should not be discouraged. In the words of the very successful businessman Steve Jobs, “I’m the only person I know that’s lost a quarter of a billion dollars in one year… It’s very character building.”
3) Correct Your Plan
This is of course connected to the point above, but if you are able to fine-tune the plan in response to a setback, then you are well placed to take advantage of the loss you have incurred. If you react quickly enough, you may well be ahead of the game in terms of placing your next trades, especially if you have been able to highlight the exact market conditions that have turned the conditions against you.
4) Return to Trading
Often traders who have suffered a loss report being unable to place another trade for some time for fear that they will lose money again. You have to fight against this feeling, and make sure that you feel confident enough to put the loss behind you and trade again. Of course, this doesn’t negate the need to stick to a plan, but should encourage you to put losses behind you quickly.
Overall, the most important thing to remember is that every trader will suffer losses whilst trading, and that your first priority is to learn to enjoy the successes whilst learning from the setbacks.
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