Strategies for managing losses in trading

Trading today has become an undeniable game of expecting the unexpected. World financial markets have been in considerable turmoil, which is hardly surprising if one considers current geopolitical conflicts and financial instabilities in major economies.

Tensions in the Middle East continue to spread, the Ukraine/Russia war shows no signs of appeasing, the attempt on former US President Donald Trump’s life, a weakening US economy, and even a 12% loss on Tokyo’s Nikkei Index on Monday, 5 August, the largest one-day drop since the ’Black Monday’ aftermath in October 1987, when a stock market crash stripped nearly 15% off this index and 20% off the S&P 500. A whirlwind of factors driving prices in unexpected directions. Whiplash, anyone?

Having the ability to manage the challenges that come with extreme volatilities requires a strong trading psychology. This becomes even more pertinent when losses come about as a result of fluctuating prices.

Successful traders typically have strategies in place to cope with trading losses. They are integrated into their day to day trading activities to ensure they maintain emotional discipline, focus and objective reasoning. In this blog we’ll explore some of the more prominent strategies adopted by traders worldwide.

Gaining effective control over your emotions

The practice of effective emotional control is a major component of trading psychology, one that is drawing significant attention from financial institutions, traders and researchers worldwide.

Why though? Well, financial decision making is largely driven by whatever a trader is feeling at a particular moment in time.

This might be fear, frustration, panic, anxiety or stress. It might also look like greed, arrogance or over-confidence. Emptional trading have the power to impact or completely disregard objective rationale. And chances are, decisions made based on any one of these emotions may very quickly lead to losses, substantial losses in fact.

So how does one cope with these losses?

It requires getting a grip on your emotions to avoid spiralling into negative behaviours like overtrading or overleveraging, leading to more loss of money. For some, this could be as simple as walking away from their computer, taking a few minutes or hours to decompress, waiting until they are calm enough to resume trading.

For others, it may involve incorporating daily habits like mindfulness or breathing exercises. It could be hitting the gym to work off any negative energy and to clear the mind. Find a strategy that works for you and integrate it into your trading activities to better manage losses when they arise.

Accept that losses are an unavoidable part of trading

Trading by no means offers sure wins 100% of the time. In fact, you’ll likely experience more losses than gains, it’s an inevitable part of this type of financial activity. And the sooner you face up to this fact, the sooner you’ll be able to cope with the losses that you’ll experience.

Additionally, also understand that not every loss comes about because of something you did wrong. Even the most experienced trader in the world will incur losses due to unsuccessful trades. Sometimes, not even skills or expertise will guarantee a win. Instead, market volatilities like those we are seeing today may be the cause of adverse price movements, and consequent losses.

The only way to cope with those types of losses is by taking a more objective approach to trading. Realise that there will always be hits but provided you stay measured and mitigate unnecessary risks, over time, those hits will hurt less and less.

Ensure you properly plan your trades

As with most things in life, failing to plan is planning to fail. In the context of trading, having an effective trading plan in place is key to managing trading losses. A trading plan is great because it sets out the parameters, the rules, by which you will open and close positions.

It includes the goals you have to keep you better focused. It incorporates the level of risk you’re willing to tolerate and the risk management techniques you plan on using to mitigate those risks. However, a trading plan is not a static reference point, it needs to be revisited and adjusted when necessary, much in the same way that positions need to be adjusted in periods of market volatility.

The plan needs to evolve as you evolve as a trader as well. The risks you are willing to incur as a beginner with little to no experience won’t be the same once you’ve gained confidence, skills, and knowledge. Change is necessary but it must be calculated, it must be well-thought out, and it must align with your strategies for managing losses as they occur.

Integrate risk management strategies into your trading plan

Putting all emotions aside, managing losses in trading is also largely dependent on the use effective use of risk management tools. Remember, successful trades are not guaranteed so you want to ensure that you put proper measures in place to reduce risks that lead to losses.

Key risk management strategies include:

• Stop-loss orders: triggered when a market price has reached a certain level, thereby automatically closing a position to limit losses.
• Take-profit orders: utilised to lock in profits, triggered when a market price reaches a predefined profit level, at which point the position is closed.
• Position sizing: as the term would imply, this refers to managing the size of a particular position, largely based on budget, risk tolerance, and expertise.
• Portfolio diversification: this refers to the allocation of capital across different asset classes to limit exposure that comes with investing all your capital into just one asset type.
• Cautious use of leverage: while leverage may amplify your wins, it can also multiply your losses, hence why the careful use of leverage is advised to better manage trading losses.
• Re-evaluation of investments: periods of downturn are typically a good time to review your investments, establish whether you want to hold onto particular stocks, and reconsider your risk tolerance.

Monitor your trades and track behaviours

Keeping a journal to record your trades is incredibly important. It offers a historical insight into the positions you entered and exited, and the rationale behind those actions. It gives you the ability to look back on what triggered certain trading behaviours or emotional reactions, and work to improve those areas that need attention.

Get a trading related education to learn how to deal with losses

Investing in ongoing education is another great strategy to learn how to manage trading losses. Regardless of your level of expertise, the acquisition of knowledge and insights never stops. It’s a continuous process that will help keep your skills refined and your scope of information updated.

For some, this looks like listening to podcasts or attending seminars. For others it may be signing up for a webinar or watching trading videos. It may even include reading books, e-guides, or blogs. Better yet, it could even involve more practical learning like signing up for a demo trading account and practicing trading using virtual money, building on your expertise before moving to a live trading environment.

Aside from the more conventional methods for acquiring an education, another way to learn is to lean on your trading community. By reaching out to other trading experts, you’ll be able to acquire varied insights, perspectives, tips, and ideas, that you may have otherwise never considered. There exists a massive online community of traders, offering a unique opportunity for you to access a wealth of knowledge and strategies for managing trading losses, amongst other things.

Become a IronFX trader

IronFX is a well-regarded broker committed to equipping traders with vital skills and strategies to manage trading losses. They accomplish this by offering a comprehensive array of educational resources, access to a multilingual support team to respond to traders’ most urgent queries, and a diverse range of trading accounts for both novice and expert traders. Traders also enjoy tight spreads, flexible leverage, rapid trade execution, and seamless deposit and withdrawal processes.

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This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.