Why you should not pursue losing trades and how to actually do it

When starting a trading journey, it’s important to have realistic expectations. Most beginner traders place a couple of orders on their demo accounts, and after making some progress, believe that trading is an easy way to make a lot of money, however, this is not true. There are many traders that blow up their account balance and lose everything. However, it should be mentioned that many others have turned trading into a profitable endeavor. If we study the most successful trades, we’ll find out that all of them are hard workers. Many of them have side businesses to run and busy lives.

Beginner traders lose money because they don’t know how to trade properly. And more seasoned traders lose money because they fail to manage their emotions. There is lots of educational material on this topic online, where there’s FX trading psychology explained.

Various studies and reports indicate that a significant percentage of retail Forex traders lose money. For instance, a study conducted by the National Futures Association (NFA) in the United States found that over 70% of traders experience losses in the analyzed period. One of the main reasons why this happens is because traders are unable to accept losses. Let’s dive deep and find out what makes it so difficult to avoid getting emotional after losing money and how to avoid it.

Accepting losses

Losing trades are a part of the process of successful trading. Beginners have this wrong idea that professionals know where the price will jump all the time. In fact, in most cases, professional traders are only right in their predictions only about 50% of the time. However, when they are correct, their profits are so large that they cover for the losing traders and increase the trading account gradually. No matter how good your trading strategies are, every strategy experiences losses. And getting emotional about your losses can lead to account balance destruction in the matter of minutes. 

It is recommended that you always place a stop loss order, and keep it unchanged if the trade goes against your predictions. When in position, the trader's judgment gets poor. An undisciplined trader moves a stop loss order when the price goes against his prediction. Typically, losing traders hope that the price goes back to the entry level to get out from the position. This strategy can work a couple of times, but it takes only one bad luck to wipe out half of the trading balance. 

After experiencing losing trades, traders need to protect themselves from the following emotions: 

• Desire to revenge trade: need to revenge trade often comes after a losing trade, or series of losing trades. This emotion clouds judgment and the result is typically increased losses. 
• Overtrading: over traders try to get back what was lost by placing more orders or increasing trade size. In addition, many over trade due to greed or feeling bored, which never ends well.
• “I’ll get out when I’m even” attitude: this attitude leads to breaking risk management rules and can lead to blown up accounts.
• Fear of trading: after experiencing losses, many traders are afraid to open new orders, even when great trading opportunities present themselves. 

How to feel confident when trading

As we have already mentioned, losing is a part of the trading process. If you have a trading system that works, and you know that it works, in other words, you have confidence in your system, you are not going to worry about a particular loss. Your goal becomes to achieve account growth after a series of trades. 

One way to feel confident about your trading system is to test it in a demo account or back-test it using trading platforms. It should be mentioned that many systems stop working after a period of time due to the dynamic nature of financial markets. To cope with market changes, professional traders upgrade their strategies or create new ones. 

Set limitations to yourself

One strategy to avoid emotional trading after experiencing losses, is to set limits to yourself. Many professional traders try to manage their emotions by setting daily, weekly, and monthly balance stop losses. For instance, when a day trader loses 100 USD in a day, he stops trading that day altogether, and continues the next day with a clear head.

The key takeaways

Overall, traders need to have a healthy approach to trading and avoid emotional trading after experiencing losses. The main emotions to be avoided are:

• Desire to revenge trade
• Need to overtrade
• “I’ll get out when I’m even” attitude
• Fear of trading great setups after experiencing losses

Professional traders use various strategies to avoid these feelings. Firstly, they build confidence in their system by testing and backtesting strategies. And lastly, they set limitations on themselves and take time off from the process of trading to clear their heads.