Going through these stages is a healthy way to cope with loss or a painful event. Financial pain is one of the hardest pains to cope with and if you trade stocks options or are anyway involved in the securities’ industry, you have most likely felt this pain. The deep gut-wrenching pain of seeing all of your profits disappear and your screen have so much red on it, you forget what the color green even looks like. I want to share with you how I have dealt with each of these stages after I have taken a loss and how so many other professional traders have reacted.
Firstly, taking a loss shouldn’t be a financially crippling event. You should be using smart risk and reward ratios when trading and ALWAYS USING A STOP LOSS. This is not a negotiable aspect of trading or investing. You can either lose a defined amount with a stop loss or hold that loss and watch your investment go to zero.
The first stage after taking a loss is denial. Thinking and saying to yourself “It’s just a small loss. It’s certain to come right back up.” Let me be the first and hopefully the only person to tell you this: it doesn’t have to come back up. That stock doesn’t have to do anything you think it should. It can go to the moon or straight to zero and there is not a thing you can do to stop it. If you are using a stop loss, you are going to know if you are right or wrong about the trade very quickly. If you’re not using a stop loss…then RIP to your account. Don’t be a bag holder and not take a small loss compared to a large one. Denial is hard to conquer and the hardest to adapt to. Just remember that a loss can happen, it will happen and most stock don’t recover. Take your small loss and move on.
After that loss comes anger and frustration. You’re mad at yourself for taking the trade. You’re mad at the company whose stock it is. Furthermore, you’re mad at your broker. You are just plain mad at everything. The best thing to do at this stage is to accept accountability for what happened. 99.99/100 errors are caused by the user when it comes to trading. I have only had a broker mess up one of my trades and I gave them all my info, and they corrected the error. Still lost money on the trade because of how trading inherently is. Here is the thing, there is no reason to get upset over a trade, the next one is around the corner, and it could be a great winner. Take the loss as an opportunity to pump the brakes and cool off. Clear your head, come back laser focused.
No matter what God you pray to or who you beg there is nothing that is going to change the outcome of that trade. A loss is a loss. The best thing to do at this stage is formulating a plan for the next time you take a loss. This way you have a guide on how to react and how to feel about your trading. Bargain with yourself, reward yourself for making smart trades by sizing up your trades. Make sure that the plan is reasonable and actionable and be honest with yourself when you fail.
People make mistakes, especially in finance. Just look at the hedge funds that shorted GME stock.
Those are “professionals” managing billions of dollars, and they lost a ton of money being dumb and shorting a sub $10 stock. Here is the thing, I’ll repeat it until I turn blue in the face: losses happen. Don’t beat yourself up. Move on. Live to trade another day. The most important thing to remember is to learn from what happened and let it burn a lesson in your mind. Success is made from failure. Fail small and fast.
This is the stage everyone should start with hen they take a loss. The best traders in the world have no emotion when it comes to taking a loss or making a profit. They recognize what it is and repeat what they know will work. Trading is meant to be boring. The moment it gets exciting you need to take a look at your risk.
Be boring and repeat what works is the main point. Double down on what makes you money and cut off what makes you lose money. If you are losing every trade, stop trading and reevaluate your strategy. IF you are winning a bunch of trades, size up and bring home some cash.