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Dealing with losses in trading

Updated: Jul 20, 2023

26th May 2021

Trading Losses

Writing down market experiences and journaling is a cathartic exercise.

It helps to deconstruct trade experiences and to learn from these experiences.

In this game, you're either EARNING or you're LEARNING.

The trade I'm focussing on here is a trade I suggested in May 2021 on the GBPUSD forex pair. I saw the trend moving steadily higher, and the price had pulled back to the upward trend line and had reversed perfectly off the trend line on the 4-hour chart.

There was also a falling wedge consolidation, and the price was beginning to break to the upper end of that wedge pattern. It seemed to tick all the boxes for a high probability trade and fitted perfectly with one of the trade setups I look for in terms of my personal trading playbook.

I had been doing OK on my UK spread trading account at the time. So with some "runs on the board", I wanted to move up the risk curve slightly. Not aggressively, but I'd been feeling that I needed to trade a little bigger than I had been.

My risk management rules stated that I should be allowing a maximum risk of £500 on individual trades, but I'd mostly been trading smaller and risking around £200 on individual trades. In order to move the needle, I needed to be a little more aggressive but within reason.

Analysing A High Probability Trade Setup

Trading Checklist

With the trade I spotted on GBPUSD, I felt that the setup ticked all the boxes for a high-probability trade, so I traded a slightly bigger position than usual.

I was in the trade from an average of 1.4160 and set a stop loss below the lowest level in the falling wedge and the reversal at 1.4120. I decided to "bet" £10 per point on the trade (with UK spread betting, you trade the value per point, so in this case, I was long £10 per point at 14160, stop loss 14120, for a risk of £400).

I felt confident that the trade was a high-probability setup and that my position size was meaningful enough to make a difference to my account if the price continued higher. But I also knew that if I were wrong on the trade, I'd be kissing goodbye the £400 on risk.

I then took my son to school in the morning and left the trade to run. I felt confident. When I got back, I noticed that the market had taken a sharp downward turn and that my stop loss at 1.4120 had been triggered. My account was now £400 less than what it had been just a short while before I had left to take my son to school. That's an expensive school run...

Later that day, the price turned back up and continued higher, just as I had been expecting.

From a psychological perspective, how do we deal with these types of situations? How do we deal with losses?

The reality is that trading is a probability game. We never have complete certainty that a trade will work out in our favour. We place a "bet" based on what we believe to be a high-probability outcome, and we decide how much money we're willing to wager to find out if our thinking is correct. That's it. We then allow the market to do what it will do.

Viewing Trading As A Long-Term Journey

Marathon runner

We need to see trading as a marathon, not a sprint. Every trade is just one trade in a journey of thousands of trades we will do during our trading career.

If the setups we trade are high probability in nature, and have a positive expectancy, then over time, we should see more of our trades being winners than losers.

And if we can ensure that our winners are bigger than our losers on average, then we will see a positive slope to our overall equity curve.

The 2% Rule: Preserving Trading Capital

Trading Capital

We have to accept that there will be losing trades, but we also have to ensure that those losers are small and won't dent our trading account too badly.

As a general rule, you should not lose more than 2% of your trading capital on an individual trade.

I'm currently not allowing myself to lose more than 1% of my capital as a maximum on my UK spread trading account... often smaller than that.

In the case of the trade I've analysed here, I really don't believe I did anything wrong. The setup was there, I knew it was a high-probability setup. The execution of the trade was good. The risk that I took on the trade was reasonable. Honestly, if I had that same trade setup presented to me again, I would trade it exactly the same way. In this case, the trade was just one of those that doesn't work out. That happens. I can comfortably stomach the loss and move on to the next trade.

"If you don't bet, you can't win. But if you lose all your chips, you can't bet"

Trading Example


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