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How to handle a loss gracefully when trading

by , 13 May 2013

Every trader loses money at one stage or another.

Sometimes things happen in the markets that are outside of your control, and are impossible to predict.

However, although you can't control the outcome of every trade, by understanding why things go wrong you control how you deal with your inevitable losers to limit your risk and maximise your reward over the long-term.

Let me explain...

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These three anomalies which causes traders to lose

Anomaly #1
Traders tend to jump straight into the market based on a story they read in the newspaper and other forms of media.

Remember as tempting as it is, when you read something, know that it’s already out there. You don’t get to enjoy information that’s not in the public domain. 

So in all likelihood, the market has already factored this information in, and you can only trade on the market's (unpredictable) reaction to the event you read about!

Anomaly #2 You never really know the intricacies and what’s actually going on in a company and in the company’s books.

You also never know, what is going to happen that day!

There could be a hostile-take-over at play, maybe the results are worse than reported, maybe another mine is going on strike or there is another fatality in a company. 

Anomaly #3 When you buy at a level, there are plenty of others trading in the opposite direction.

So not only do we lose because of unpredictable events, we also lose because, the market is just one big distribution of random probabilities.

Quite a mouthful, no worries. All I’m saying is this... The market moves the way it wants to move.

So if the market is going up, why go against it? Just follow it.

When the market turns around, we should act on it and limit our potential losses rather than going into panic mode. 

There’s enough money in the market for us all to be winners. As long as we have the courtesy of giving back some time to time.

Next, we need to consider ways of handling these losses.


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Three tips on handling your losses

Tip #1 Risk only how much you’re willing to lose.

If you’re risky by nature, maybe you would like to risk 5% of your trade.

If you’re like me, more risk–averse, I’m only willing to risk two to three percent per trade of my portfolio.

Tip #2 Think of trading as a job where losses are just another cost of doing business.

Some days, business is good and other days, you feel like closing down the shop.

The trick is to reduce your ‘loss overheads’ by accepting it quickly and moving on to the next business trade venture.

Tip #3 Analyse the size of the unpredictable event once the news has been released.

Instead of pulling your teeth out, rather manage your trade and limit your loss.

Panic serves no justice to your bank balance.

So all in all, losses, in my opinion, are just an unfortunate part of the excitement of trading.

They are normal events in the trading cycle and everyone will take them, time to time.

How you handle the losses and how much you risk per trade is another story.

I’ll leave you with this quote that you can go and think about.

“I've missed more than 9000 shots in my career. I've lost almost 300 games. 26 times, I've been trusted to take the game winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed “ - Michael Jordan

Other Articles By Timon Rossolimos

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Tags: trading, trades,

How to handle a loss gracefully when trading
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