I see so much advice in regards to how to handle losing trades, such as; “Don’t take losses to heart”, “Learn to embrace losses”, “Let go of losses” and whilst this advice is all important, it doesn’t help a new trader whatsoever.
One thing that’s important to remember is, and let me use an analogy, “You can’t learn to walk without first falling a few times”. The same applies to learning to ride a bike, you have to fall off the bike to learn how to eventually stay on it, and when it comes to trading, unfortunately losing money is the only way to learn how not to lose money (And god knows, I’ve been there myself).
Most beginners will suffer a heavy loss at a point in their early trading careers by holding a losing trade until the pain is too much, then they’ll close out for a huge and both emotional and financially damaging loss. This is what it takes for most to learn not to hold a losing trade, and it’s the same with many other techniques, strategies, setups and elements of risk; Until you’ve tried them and learned the hard way what works and what doesn’t, in alignment with your personality, overall, you’ll lose money.
Money is personal, and naturally our mind wonders towards thinking about all the things we’ll spend our winnings on when we close winning trades, or worse, when we’re staring at an open P&L (Advice: Disable your P&L so you can’t see it whilst you’re actively trading or it will cause you to trade with emotion rather than logic. Trust me, I’ve been there) and the first step to solving this problem and removing our emotional attachment to profits and worse, open and unrealised profits, is to trade small.
Trade at a size so small you can happily place a trade and the outcome will not bother you whatsoever. Trade so small that 10 losses in a row doesn’t phase you. This is one of the most important keys in learning to trade, and one I wish someone told me at the start of my career. Start small and build up, because it’s not just your capital and your skillset you’ll be building, but also the mental ability to deal with losses which is priceless as a trader. As your account grows, each small incremental step forward will feel natural, not forced, and will give you the confidence needed to gradually up your size.
Position sizing should revolve around risk. Typically, risking roughly 0.5% – 1% of your total account size per trade will enable you to make your way through the learning curve, keeping you in the game whilst you learn what works and what doesn’t. For example;
£5,000 account, 0.5% [£25] – 1% [£50] risked per trade.
At such a risk percentage, it’d take a consecutive run of 200 losses in a row to wipe you out at 0.5% r/p/t, or 100 losses in a row to wipe you out at 1% r/p/t. On a smaller account, say £1000, your risk may need to be slightly higher as you build the account, but trade as small as you can, again, to enable you to make your way through the learning curve.
Yes trading small is deflating, hell, even boring, but are you in this game to learn and trade long-term, or are you here to have some fun and empty your account? Those are the only two possible outcomes. You have two options; Start small, learn, grow, build your account and reap the rewards, or empty your account.
Don’t be the person who thinks; “All I need is a few ticks at £10 a point and I’ve made £100”, because that one time that price instantly goes against you, and doesn’t come back, might just be the end of your trading career, or at least your account.
– Trade so small that even an extreme of 10 consecutive losses won’t phase you. It’s rare but it can and will happen. Make sure you’re prepared, especially early on in your trading career before you’ve developed your mental edge.
– Hide your open P&L and ideally, unless you’re scalping, don’t monitor unrealised profit. It’s not your money until the trade is closed.
– Think longevity over quick profits.
I hope this helps, and if it does (or doesn’t), feel free to tweet me and let me know your thoughts.