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3 Ways To Handle Trading Losses

I was recently asked by a trader if there was a medication to help with trading psychology and keep the trader’s “mood up” after a trading loss. This trader wanted to feel better after the inevitable losses occurred.

As a psychologist who works with traders, I hear this question often: “How can I feel good in the face of a loss?”

First of all, recognize that medication isn’t the answer. Although I do not prescribe medications (psychiatrists prescribe meds, psychologists do not), I am generally familiar with most of the classes of psychotropic drugs. Medications can be very helpful for persons with severe psychiatric aliments. They often make the difference in helping individuals with severe psychiatric challenges be able to function within the everyday world.

Serious Questions About The Effectiveness Of Some Medications That Affect Mood

The efficacy of some widely prescribed medications that affect mood, however, is under serious question. Now that the clinical trial data for some of the newer antidepressant drugs have become available to researchers, these data are being reanalyzed and looked at more closely. Some studies are finding that the clinical effect of these medications may be no better than placebo (sugar pill) for all but the most severely depressed.

I am not surprised by these findings. When I was doing a lot of clinical work in the 1990s, I often heard psychiatrists I worked with complain that the new antidepressants worked well for a while, then “pooped out” (their term). It was a common problem. It may simply have been that the placebo effect had worn off.

Given all the adverse side effects possible with some of these medications (just listen to the litany of side effects described on any of the television commercials promoting an antidepressant), you want to be aware of the risks associated with any psychotropic drug.

A medication is unlikely to help you feel better about a trading loss. There is no simple “fix” to the emotional problem of losses. No one likes to lose money, and a loss can be painful. But, it is also a part of your job description as a trader. Part of our job is to take losses.

Three Key Tips To Help You Better Handle Trading Losses:

1. Have a trading edge. Define your trade setups well and be sure they have an edge. By edge I mean that these setups have a certain probability of winning over a large number of trades. In other words, based on your trading experience or historical testing, your trade setup has a positive expectancy that over, say, 100 trades some percentage (e.g., 67%) will be winners. If you don’t have a trading edge, you are likely trading random patterns and you are likely to have many, many losses.

2. Know the probabilities of your edge and think in terms of these probabilities. No trade setup works 100 percent of the time. If, for example, your edge has a 67% win rate, then you know that it also has a 33% loss rate. One out of every three trades is expected to be a loser. Knowing this gives you some psychological cover. When you do have a loss, it isn’t the ‘end of the world’ for you. It is simply an expected outcome of your edge.

3. Keep your risk well within levels you can tolerate. Keep in mind that psychologically, we amplify the experience of a loss. Studies show that we tend to experience a loss about 2.5 times the magnitude of a win of a similar size. In other words, if we have a winning trade of $1,000, we feel good. If we lose $1,000, it feels like we’ve lost $2,500. If you keep your risk at reasonable levels, then a loss is not experienced as painful. A good rule of thumb is to keep your risk level to between 1% and 2% of your account equity for any given trade.

Trading is a demanding game to master. Part of that game is to be able to handle the psychological experience of losses and this doesn’t come in the form of a pill.

 

Sourced from Ezinearticle

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