Nine out of ten people who are reading this have either lost money in trading or knows someone who did. If that's you, then the question is, "what's next?" You've already invested a good chunk of your time in trading. Is it high time to throw in the towel? Well, before you give up, do consider that there are some ways for you to recuperate from your trading failure, and in this article, you'll find a few ideas to get back up.
When you're losing one trade after another, and you're nearing a margin call, perhaps it may do you some good if you think back for a minute. Thinking pertains to a few things:
Is trading really for you?
Trading is challenging for the inexperienced investor, and even those with experience, still, crumble in defeat. Think about the traits required for an investor to trade successfully: a love for analytics and meticulosity -- in addition to steady emotions, which is tackled later.
A knack for numbers is central to profitable trading because dealing in the financial markets predisposes you to prices and particular strategies that involve, in one way or another, a form of math.
Simply clicking buy and sell market orders on your trading platform arbitrarily isn't a smart way to approach trading and is a sure-fire way for you to fail.
Meticulosity in timing trade entries and exits
If you haven't laid out a plan for opening and closing trades, emotions will kick in and derail you from what was supposed to be a winning trading setup.
So, if you have no patience for planning, you better plan to quit; otherwise, it's just not going to work out.
The asset you're trading
Lastly, perhaps the asset you're trading is just not suited for you, or the time frame you're using is a little too fast for your liking, or it could be that long-term investing might suit you best. Regardless of the reason, you should take plenty of time to contemplate, and once you've addressed all of your doubts, then it's up to you to decide whether to continue trading or not.
One question you must ask when you've lost consecutive trades is if you're following your strategy religiously. Of course, your strategy should have rules that are designed for you to mechanically truncate bad trades or automatically cap off precise profit targets to prevent wild price swings.
If your strategy works fine in your backtesting sessions, it's possible that you may have failed to follow your rules to a tee in actual trading or your strategy could no longer be viable.
Your job now is to make assessments.
Try going over your trading history and examine whether you can spot errors. If nothing seems to be off, then backtest your strategy once more in recent data and record your results.
Want to learn how to backtest? Click here.
3. Read more
Some traders lose money in the market because they are too eager to start trading and too lazy to try learning. A glimpse of a quick profit from a demo account excites them to put real money on the line.
If you're serious about trading and you want to make a full-time or part-time career out of it, then absorbing as much information as you can is key to your trading survival.
There are a plethora of resources out there to help you gain a better trading perspective, and it's up to you to allocate some time to learn about them.
Although not a trader, Warren Buffett attributes constant learning to his success, and in fact, reading 500 pages a day as preparation for an investment career is what he advised a student who's now an employee of Berkshire Hathaway.
4. Get hold of your emotions
Let's accept the fact that trading isn't for you if you don't possess a machine-like temperament when things go south. The market will penalize you for your volatile emotions with more significant losses. Also, your actions that aren't justified by logical reasoning will eventually turn into regrets.
A classic example of poor trading that's a result of emotional instability is "cutting profits short and letting losses run."
That example is elucidated by a trader who can't accept a losing trade and has, therefore, clung on to his paper loss for months or years hoping that one day it will reverse -- i.e., the sunk cost fallacy. In addition to that, when it comes to profit-taking, the trader closes trades once he sees a morsel of gain.
Here's a put-down for that: if you were that trader and the majority of your capital are frozen in that long-running paper loss, does closing that trade at a 2% bounce above break-even after spending three years in negative territory make sense investment-wise?
That capital could have accumulated better returns in those three years if it was invested in a bond had you learned to "let profits run and cut losses short."
5. Accept a losing trade
"Doubling down" on a bad trade is another flawed strategy with amplified risk; its result isn't always savory. This happens when you increase or double your initial position on a losing trade with hopes of gaining twice the reward once it moves to your direction -- it's another cognitive distortion.
There's a scene in the movie Focus where Nicky, played by Will Smith, got into some high-stakes betting against a big-time gambler, Liyuan Tse (B.D. Wong), in a football match. Nicky won the first bet with $1000 by guessing the team that draws the next penalty.
But, he lost bet after bet to Liyuan while doubling up his stakes in each wager, which eventually ballooned to 2.2 million dollars. The final bet Nicky made won him the whole amount, but it happened with some intricate premeditation from him and his crew's part.
Since no trader has the power to organize victories, it's best to keep away from very risky trade setups. Only a handful of investors were able to walk away with a sack of loot from entering such trades, so accepting your losing trade by closing the position will offer you a better chance of survival.
6. Less is more
Day trading is often criticized because investors who practice it have the audaciousness to fiddle around with daily price movements or in Dow Theory terms, the minor trends.
Minor trends present inadequate data to predict the long term direction of an asset; thus, it would surely be a game of chance to day trade.
Trading less often, especially after a string of losses, gives you time to recollect and reassess your strategies and your approach; it also prevents you from recklessly redeeming yourself from unprofitable trades.
So, there you have it. These are just some ways for you to bounce back from defeat. It's important to consider if trading is really for you or if you just lack experience or knowledge. But remember, the biggest roadblock is still the instability of your emotions. You need to be able to manage how you respond to victory and defeat for you to see some success in trading.
READY TO TRADE AGAIN?
Why not take baby steps before taking on a big leap into real trading?
Try to trade using a demo account first.