Losing money is part of the trading process. Indeed, you will never find a trader who has not gone through a period of losing money. This also includes some of the most successful investors like Warren Buffett and David Einhorn.
So, you will lose money at certain periods. However, as you will find out, at times, losing is what makes you a better trader. For one, when you lose, you avoid repeating the same mistake again.
For example, if you lose money after opening a market order before earnings, then you will avoid repeating that mistake. Instead, you will embrace the concept of opening pending orders ahead of earnings.
Therefore, while you can learn many things after making money, you will often learn more lessons when you make a loss.
Therefore, losing money should not be the end of your trading journey. It should be part of the process that you use to become a better you.
By losing, you learn
When you open a losing trade, you end up learning the mistakes that you have done. Foolish is the trader who doesn’t learn from his mistakes!
By understanding the mistakes that you make, you will then be at a good position to avoid them in future.
Let’s say you opened a trade before a major economic news thinking that the news will go your way. If you lose money in this way, chances are high that you will avoid making the same mistake during the next data releases.
How to do this? Keeping track of your trades with a journal is without doubt a great way to remember both the losses and the reasons why they came.
Change of strategy
Maybe you are experimenting this strategy that you think will make you money. You need to realize that no strategy is ever perfect. Even the leading traders don’t have a 100% success rate.
When you lose money, it will help you change or modify the strategy to make it more accurate. Remember that a strategy that is not changed or altered is a recipe for future disaster.
If you don’t know where to start, or you want some alternatives to what you already use, here are some of the best and most effective trading strategies.
Risk management is one of the leading skills you need to learn as a trader. In simple words, risk management is a strategy that ensures that you lose money that you can confidently lose.
For instance, if you have $1000 and you lose $5, chances are that you won’t feel the pain. If on the other hand you lose $200, chances are that you will feel the pain. Risk management enables you to avoid such losses.
» Related: Position Sizing & Risk Management
One reason why many people lose a lot of money is simply because they open large trades. While opening large trades can make you more money if things go right, it exposes you to more losses when things don’t go your way.
For example, one reason why Bill Ackman lost more than $4 billion when his Valeant wager went south is that he had invested a lot of money on the company. Since that time, he has changed his strategy and expanded the number of companies that he invests in.
As a trader, you should have a small risk reward ratio. For example, you should pledge never to risk more than 10% of your capital in one trade. By doing that, you will be at a good position to make money while reducing your risks.
Refine your expectations
One of the main reasons why most people become traders is that they want to make a lot of money. For one, trading is often advertised as a way of making good money when doing little.
Expectations are also a reason why most traders lose money. For example, instead of opening a small trade and make a small amount of profit, they want to open a big trade and make more money.
However, opening a big trade exposes you to more losses. Therefore after losing money, it will help you set realistic expectations.
You are in good company
Finally, when you lose money, always remember that you are in good company. Most of all top shots in the financial markets have lost money before.
Bill Ackman lost more than $400 million dollars. Before that, his first fund, Gotham Partners failed. In the 70s, Warren Buffet lost more than $700 million. Carl Icahn, the legendary investor have also lost billions of dollars before.
These losses have made these investors become better investors because they learn from their mistakes (Look, the first advice we gave you!).
» Related: How to Deal With Huge Trading Losses?
No one loves losing money in the market. We all want our trades to work perfectly. But this is not possible regardless of the trading strategy that you have. Therefore, in this article, we have looked at some of the reasons why you should use all your losses as a learning experience.
External useful resources
- Why You Need to Learn to Lose Properly to Win at Trading – Learn to Trade Markets