There’s no escaping it.
If you’re trading stocks or options or dealing in the stock market somehow, you’re most likely going to lose money at some point.
It sucks. And most people that don’t know how to handle this downside of trading will most likely quit.
Here are some tips to deal with losses;
1. Cut Your Losses ASAP
Whenever you enter a position, there are only 3 possible outcomes. You’ll either;
Win, break-even or lose money.
The third option is nasty and unpleasant. After all, we’re all in this game to stay profitable.
But it happens to everyone — both beginners and veteran traders. And 90% of people do not recover!
I understand how big losses can mess up your mind and stir emotions that will affect your performance.
I lose money on trades too — you can peek at my trading journal to have a look. But what’s important is knowing how to manage it.
One of the biggest mistakes anyone can make is continuing to stay in a position that’s failing.
It sounds like a simple rule, but it’s difficult for a lot of traders to follow, mostly because emotions get in the way and they hope for the best (which almost never comes).
There will always be another trade. A single trade will never make you rich, but one bad one can wreck your account.
The first and most important step to dealing with a position going against you is to exit before things can get worse.
2. Set Stop Losses
From my years of experience in swing trading, I’ve learned that one of the keys to staying profitable is keeping your losses as small as possible.
Yes, there’s no guarantee you won’t lose money…
But having a solid plan and sticking to it can help you keep losses at a minimum.
When a trade goes against you, especially when you’re dealing with volatile stocks, a stop-loss order is important to reduce risk.
In a previous article, I mentioned that…
“The markets are masters of exploiting weaknesses, and if you don’t have your emotions out of the way, your account will suffer.”
Think of your stop order as your exit plan — it’s there to block emotions from kicking in and limit your losses.
Here’s a refresher:
Stop orders are a way of telling your broker to buy or sell a stock when it reaches a certain price.
While a limit order is an order to buy or sell a security at a specific price or better. For example, ABC is trading at $10 and you set a limit order to buy 500 shares at a limit of $10.50, your broker will purchase up to 500 shares at any price under $10.50.
Sometimes I like to use a combination of both — the stop-limit order.
The stop-limit order combines the features of a stop loss with those of a limit order to reduce risk. It basically triggers a limit order when a stock price hits the stop level.
Here’s how it works:
Let’s assume a certain stock (XYZ) is trading at $20 and I plan to buy once it starts to show some upward momentum.
I then put in a stop-limit order to buy with the stop price at $25 and the limit price at $30. If the stock price rises past the $25 stop price, then the order is activated and turns into a limit order.
As long as the order can be filled under $30, which is the limit price, the trade will be filled. If the stock gaps are above $30, then the order will not be filled.
This type of order comes in handy for swing traders who can’t watch the markets all day. And is efficient when it comes to penny stocks with low trading volume.
3. Analyze Your Mistakes And Learn From Them
No one is perfect. It’s okay to lose.
I know, I know…it’s not pleasant, but the bright side is…you get to learn from your mistakes and be a better trader.
Whenever I take a loss, I like to take some time off and then review the decisions I made with fresh eyes.
In doing so, I aim to figure out key lessons like;
- What I would have done differently
- Why I should have taken a different approach
- How things would have turned out if I had acted differently
Questions like these help me to spot my mistakes so I’ll avoid going down that path twice.
The important part of this process is that I do not allow my losses to define me.
Even though my account takes a hit, I don’t take it personally. After all, there are other people out there that probably had it worse.
Focusing on it and attaching emotions would only make matters worse and cloud your judgment.