Losing A Trade

Losing money is a horrible feeling, especially in trading. The money just evaporates from your account, just like that. Gone. When a trade is lost, not only the money goes, but also a chunk of pride. You thought you were doing everything right, but then the market decides to take what you have. You spent days, weeks, months, years learning how to trade. You spend days back-testing a strategy. You even tested the system in a demo account. You moved to a live account and had a few wins, but then you started losing trades left and right. Now you have a negative realized P&L. What happened? It shouldn't be like this. Trading is a scam and impossible...

Sound relatable? Let me rewrite that paragraph from a different perspective.

Losing money is an invaluable experience, especially in trading. Each loss can be seen as an investment into your own education, paid into the markets. When a trade is lost not only do you learn, but you also have an opportunity to improve self-discipline and collect more data for your journal. You understand that not every system wins 100% of trades. You understand probabilities and statistics and that it's inevitable that you will have losing streaks. You know how long your losing streaks should be as you have back-tested your system. When you compare your live account and back-tested data you can see that the few trades you have taken are similar to a specific period in time of the data.

Do you see the difference? The same event described in two completely opposing ways. You need to decide how you are going to look at losses. Here's a nice quotation to write onto a sticky note for your trading desk:

“If you are distressed by anything external, the pain is not due to the thing itself, but to your estimate of it; and this you have the power to revoke at any moment.” ― Marcus Aurelius, Meditations

Of course, you also need to understand when and if your strategy just simply doesn't actually work. If you haven't tested it in some way, it may not be a good idea to trade it. If you also see 20 losing trades in a row with a strategy that should win 50% of the time, then something has probably gone wrong. You need to make sure you trade your system the same way that you tested it, otherwise you cannot expect to get results similar to those of the data you collected. You need to put rules in place to manage your risk, modified to your risk-appetite.

Good luck!