Understanding the Nature of Trading Losses
No matter how good of a trader you are, you will lose money. Losing is a part of the game. Now our job is not to avoid losing money, but it's to become better at losing when it comes to trading. Now most traders, when they get started and they have a losing period or a losing trade, they allow that loss to affect them very, very bad where they have gone tilt or have a massive drawdown or blow their account.
Good traders are able to take losses and they're able to adjust by identifying what the mistakes are, what they have to do, and what they need to work on to actually get out of this slump. In this video, I want to talk about good losing versus bad losing.
I want to talk about how to become a good loser in trading, and then I also want to share one of my personal losses I recently had where I lost about $13,000 and how I'm able to identify my mistakes and recover from a trading loss.
Distinguishing Good Losses from Bad Losses
So let's talk about good losing versus bad losing. As I mentioned before, you will lose on trades, you will have losing periods, and so on. Now it's impossible to avoid that, but what we do want to identify is when we do have a losing trade, we want to put the big question mark: was this a good loss or a bad loss?
Now the way I differentiate a good loss from a bad loss is by looking at the following factors. So if I have a trade, I ask myself: Did I lose my predefined risk amount? Was this trade part of my game plan? Was this setup part of my playbook, part of my strategy?
Did I have an entry signal with this setup? These are some of the questions I'd like to ask when I look at a trade. Now if I do look at a trade and that trade did not fall under my entry signal, my setup, my game plan, or my risk tolerance that I typically set out, that typically comes out to be a bad losing trade.
Now, if the trade does fall under the realm of: I had an entry signal, I followed my risk plan, it was in my game plan, everything with that trade really worked out, but the trade still didn't go in my favor. I'll take that loss and I'll say, you know what, this was a good loss, it's okay, it's gonna happen. Is there anything I need to tweak, or was I just wrong? Understand there's going to be times where everything looks great on the trade, but the trade still tends to go the opposite way.
This is the market. The market is at times random. At times there are unknown things that come into the market that we can't predict or we can't get ahead of, and when that happens, we are supposed to take our predefined losses. That is our job. Now if we overlook something, if we didn't manage our risk properly, now that categorizes it as a bad loss, and that is something that we need to be careful with.
Now whenever you guys look at any trade, winner or loser, whatever the case is, I want you to look at these trades and identify it. Was this a good winner? A bad winner? Was this a good loser? A bad loser? I want you to start differentiating that in your trading journal. Go through every single trade you have and start differentiating that, and you'll start noticing so many red flags.
You'll look at some trades and you'll say, "Wow, I was supposed to risk only $500, but I ended up losing a thousand. Wow, I was very impatient on this setup. Wow, I didn't even have a setup. So I lost $500 or I lost $1,000, but this wasn't even in my game plan."
So you realize if you start eliminating these trades, your trading profits just magically get better. But then once again, on the flip side, there are trades that you followed everything, and it didn't work out.
And when you see these losses, you have to accept it, you have to understand this is you paying your dues to the market. So because we understand that losing is a part of the game.
Becoming a Good Loser: Mindset and Risk Management
The question is, how do we become good at losing?
Now there are a few frameworks that I have that allow me to process this. Number one, I understand that losing is a part of the game. I have engraved that in my head. I understand trading operates as a business.
So as a business, we will have profits, we will have losses. So when I do take my good losses, and I'm not talking about my bad losses, I'm talking about my good losses. When my good losses do come in, that's me essentially having business expenses.
That's me having expenses, elements that I have to pay for to be able to take the opportunities where I do make money. So that's something I followed. That's something I've engraved mentally. So when I have that good losing trade, I'm like, you know what?
I risked $1,000. I had to risk this $1,000 to be able to capitalize on the opportunity that's present. Now maybe I didn't capitalize on it this time, but maybe the next time I'll be able to capitalize on it.
So essentially becoming a good loser, it's a mindset shift, right? So, you know, everything else that we deal with in the world, it's like losing is bad, losing is bad, losing is bad. But with trading, you guys have to kind of have that shift, that shift comes from, well, yeah, losing is bad, but in trading, markets will be unknown sometimes.
Markets will be difficult sometimes. Sometimes you can do everything right and still be wrong. And if I am able to understand that and I'm able to recognize that, that will allow me to not let the losses affect my trading.
That won't allow the losses to come in and impact my day-to-day operations as a trader. I also have good risk management strategies implemented within my trading that allows me to become a good loser, right?
That allows me to look at trades and say, well, you know what, if I'm wrong, I will lose $500 or I will lose $1,000. But if I am right, I will make $2,000 or $2,500 or $1,500 at times, right? And then I'm also able to keep my risk minimal according to my account size.
Some traders are not able to become good at losing because they overtrade, they overleverage their account. If their account is at $1,000, they are risking $500 on the trade, right? So of course you're not gonna be good at losing because one or two bad trades will wipe you out.
So you also have to make sure your losses are minimal, especially according to your account size. So something that you guys could follow is maybe risk 1% or maybe 2% of your account size on a singular trade and keep that consistent over a long period of time before you look to size up.
Now, when you keep that consistent, it will be easier for you to take on losses because the losses won't be massive, they won't be big. There'll be small losses that you can keep eating at if you do hit a losing period.
Dealing with Trading Losses: Identifying and Learning
Now the question is, how do I deal with trading losses? So recently, I had a $13,000 losing day. I posted this on Twitter, on Instagram, and I called myself an idiot. I said, "I'm an idiot, and I deserved to lose money today."
Now, I'll tell you why I said I deserved to lose money. So my trade that I took, or my trading day, was all me just being stupid. It's just me being honest. I was completely stupid that day. And I know people are like, "Oh my God, why are you calling yourself stupid?"
Because I was, I was being very stupid. And going back to my first point of a good trade and a bad trade, that was a bad trade. That was a bad day. Going into the session, I had no game plan. I showed up in front of my computer five minutes before the market opened, and I was just expecting to make money with no predefined rules for the day, no understanding, no context of what is happening.
And I just jumped into the session, like, "Hey, I'm gonna make money." I went into both trades with having no setup, no entry signal, and no defined risk. My second trade that I lost $10,000 on a single trade, I was planning to lose about $5,000.
I... Oversized, I got aggressive just trying to make money and I ultimately lost $13,000. Now, the point here that I'm trying to make is when I look at that loss, that was a bad loss. So it's harder for me to get over a bad loss because that's not something that should have happened in the first place.
If that loss was something, as I mentioned before, a good loss where I did have a setup, I did have an entry signal, I did prepare before the market opened, that now becomes a good loss. It becomes a loss that I was essentially prepared for.
I did my due diligence, I did the work that I was required to do, I looked for the entry signals, the market gave me the entry signals, but in this particular trade, none of that happened. So I'm able to categorize that for myself and say that bad loss, bad trading day, and I need to get better.
Now, how do I essentially get over a bad losing day or a losing day in general? So the first thing is to be able to identify why you had the losing day. Now, sometimes you have a bad read on the market, you have a bad read on the trade, you didn't understand the market context, market direction, you kind of have no idea what's going on and you take random trades. So for me, that's essentially kind of what happened, I didn't have any of those things.
Self-Reflection and Improvement After a Loss
So I'll go back into the trade and I'll put a big question mark, which is why did I enter, why did I exit, what happened in my pre-market game plan, what was my game plan or outlook for the day, what actually happened for the day, what could I have done better, was my size proper or not, did I over-trade in that trade, right?
And how was my execution? So I'll start looking at all these things and then I'll start breaking it down individually to identify what needs work, right? What do I need to work on? So for me, for this particular trade, what do I need to work on?
Number one, I had no game plan as mentioned, so I should have had a game plan. So moving forward, have a game plan, set the tone for the day, have an understanding what is happening with the overall market.
Number two, set entry criteria, is what entry criteria I need to take on this trade or set up that I'm looking for. I went into the day with no setup, no entry criteria, that is something I need to do going into the next day.
Now, when I do have a big losing trade or a losing trade in general, depending on how bad it is, especially if it's a bad trade, loss or something that I wasn't anticipating, I don't like to go into the next day with more size or more risk.
I like to either cut my risk down and be more on the cash side and risk-off side because typically what happens, especially if you are a beginner and you are just getting started, what will typically happen is when you lose money the first thing that pops into your brain is "I need to make this money back."
I need to go and I need to make the $10,000 I lost. I need to go and make $13,000 I lost, and you go in and you go in with the bias, you go in being super aggressive, you go in with just trying to make that money back and typically the way to overcome that is size down, write down your thought process and what the market is telling you.
And you have to let go of that losing trade or day. You have to let go of it. You have to say, "I took a loss, it's a business expense, I'm gonna write it off and I'm gonna move on from it." Until you feel like you've moved on from it and you let it go, it will bleed onto your next trading day or next trading session or whatever the case is.
So you have to get yourself to a point of letting go of that day, letting go of that trade and starting the day with the brand new slate and reducing your risk. So if that does bleed in, your loss won't be substantial.
Embracing Losses as Part of the Trading Journey
So with that being said, just wanted to share my thoughts on losing days. I wanted to tell you guys, we all are gonna lose money. I lose money, every professional trader, great trader, whatever it is, loses money.
I don't know what social media tells you guys that everyone is profitable every single day. It's not the case, I promise you it's not the case. So when you have a losing day, don't get upset, don't get mad at yourself, it's part of the game, but just keep it manageable, keep it small and just learn from it.
Continuously learn from losing days as much as possible and be able to differentiate between good and losing days and that's it. So with that being said, once again, thank you for reading the article, and I will see you guys on the next article.