How to Accept Trading Losses and Their Importance in One’s Self-Development as a Trader

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Top 10 Rules For Successful Trading

Anyone who wants to become a profitable stock trader need only spend a few minutes online to find such phrases as “plan your trade; trade your plan” and “keep your losses to a minimum.” For new traders, these tidbits can seem more like a distraction than actionable advice. If you’re new to trading, you probably just want to know how to hurry up and make money.

Each of the rules below is important, but when they work together the effects are strong. Keeping them in mind can greatly increase your odds of succeeding in the markets.

Key Takeaways

  • Treat trading like a business, not a hobby or a job.
  • Learn everything about the business.
  • Set realistic expectations for your business.

Rule 1: Always Use a Trading Plan

A trading plan is a written set of rules that specifies a trader’s entry, exit and money management criteria for every purchase.

With today’s technology, it is easy to test a trading idea before risking real money. Known as backtesting, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading.

Sometimes your trading plan won’t work. Bail out of it and start over.

The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor strategy.

Jack Schwager: Investopedia Profile

Rule 2: Treat Trading Like a Business

To be successful, you must approach trading as a full- or part-time business, not as a hobby or a job.

If it’s approached as a hobby, there is no real commitment to learning. If it’s a job, it can be frustrating because there is no regular paycheck.

Trading is a business and incurs expenses, losses, taxes, uncertainty, stress, and risk. As a trader, you are essentially a small business owner and you must research and strategize to maximize your business’s potential.

Rule 3: Use Technology to Your Advantage

Trading is a competitive business. It’s safe to assume that the person sitting on the other side of a trade is taking full advantage of all of the available technology.

Charting platforms give traders an infinite variety of ways to view and analyze the markets. Backtesting an idea using historical data prevents costly missteps. Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, like a high-speed internet connection, can greatly increase trading performance.

Using technology to your advantage, and keeping current with new products, can be fun and rewarding in trading.

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Rule 4: Protect Your Trading Capital

Saving enough money to fund a trading account takes a great deal of time and effort. It can be even more difficult if you have to do it twice.

It is important to note that protecting your trading capital is not synonymous with never experiencing a losing trade. All traders have losing trades. Protecting capital entails not taking unnecessary risks and doing everything you can to preserve your trading business.

Rule 5: Become a Student of the Markets

Think of it as continuing education. Traders need to remain focused on learning more each day. It is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process.

Hard research allows traders to understand the facts, like what the different economic reports mean. Focus and observation allow traders to sharpen their instincts and learn the nuances.

World politics, news events, economic trends—even the weather—all have an impact on the markets. The market environment is dynamic. The more traders understand the past and current markets, the better prepared they are to face the future.

Rule 6: Risk Only What You Can Afford to Lose

Before you start using real cash, make sure that all of the money in that trading account is truly expendable. If it’s not, the trader should keep saving until it is.

Money in a trading account should not be allocated for the kids’ college tuition or paying the mortgage. Traders must never allow themselves to think they are simply borrowing money from these other important obligations.

Losing money is traumatic enough. It is even more so if it is capital that should have never been risked in the first place.

Rule 7: Develop a Methodology Based on Facts

Taking the time to develop a sound trading methodology is worth the effort. It may be tempting to believe in the “so easy it’s like printing money” trading scams that are prevalent on the internet. But facts, not emotions or hope, should be the inspiration behind developing a trading plan.

Traders who are not in a hurry to learn typically have an easier time sifting through all of the information available on the internet. Consider this: if you were to start a new career, more than likely you would need to study at a college or university for at least a year or two before you were qualified to even apply for a position in the new field. Learning how to trade demands at least the same amount of time and fact-driven research and study.

Rule 8: Always Use a Stop Loss

A stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be a dollar amount or percentage, but either way, it limits the trader’s exposure during a trade. Using a stop loss can take some of the stress out of trading since we know that we will only lose X amount on any given trade.

Not having a stop loss is bad practice, even if it leads to a winning trade. Exiting with a stop loss, and therefore having a losing trade, is still good trading if it falls within the trading plan’s rules.

The ideal is to exit all trades with a profit, but that is not realistic. Using a protective stop loss helps ensure that losses and risks are limited.

Rule 9: Know When to Stop Trading

There are two reasons to stop trading: an ineffective trading plan, and an ineffective trader.

An ineffective trading plan shows much greater losses than were anticipated in historical testing. That happens. Markets may have changed, or volatility may have lessened. For whatever reason, the trading plan simply is not performing as expected.

Stay unemotional and businesslike. It’s time to reevaluate the trading plan and make a few changes or to start over with a new trading plan.

An unsuccessful trading plan is a problem that needs to be solved. It is not necessarily the end of the trading business.

An ineffective trader is one who makes a trading plan but is unable to follow it. External stress, poor habits, and lack of physical activity can all contribute to this problem. A trader who is not in peak condition for trading should consider taking a break. After any difficulties and challenges have been dealt with, the trader can return to business.

Rule 10: Keep Trading in Perspective

Stay focused on the big picture when trading. A losing trade should not surprise us; It’s a part of trading. A winning trade is just one step along the path to a profitable business. It is the cumulative profits that make a difference.

Once a trader accepts wins and losses as part of the business, emotions will have less of an effect on trading performance. That is not to say that we cannot be excited about a particularly fruitful trade, but we must keep in mind that a losing trade is never far off.

Setting realistic goals is an essential part of keeping trading in perspective. Your business should earn a reasonable return in a reasonable amount of time. If you expect to be a multi-millionaire by Tuesday, you’re setting yourself up for failure.

Conclusion

Understanding the importance of each of these trading rules, and how they work together, can help a trader establish a viable trading business. Trading is hard work, and traders who have the discipline and patience to follow these rules can increase their odds of success in a very competitive arena.

The Art of Cutting Your Losses

One of the most enduring sayings on Wall Street is “Cut your losses short and let your winners run.” Sage advice, but many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it lose even more.

No one will deliberately buy a stock that they believe will go down in price and be worth less than what they paid for it. However, buying stocks that drop in value is inherent to investing. The objective, therefore, is not to avoid losses but to minimize losses. Realizing a capital loss before it gets out of hand separates successful investors from the rest. In this article, we’ll help you stand out from the crowd and show you how to identify when you should make your move.

Key Takeaways

  • Although stock market indexes typically move higher over longer periods of time, individual stocks don’t always keep pace and many less successful ones can suffer long periods of losses.
  • It is not uncommon for individual investors to hold losing stocks, expecting a turnaround, only to see it fall further still.
  • In a worst-case scenario, the company goes bankrupt.
  • Having a written plan will help you decide when and why a losing stock should be removed from the portfolio.
  • Stop loss orders can be used to automatically exit a position and take a loss when a stock turns sour.

Holding Stocks With Large Losses

In spite of the logic for cutting losses short, many small investors are still left holding the proverbial bag. They inevitably end up with a number of stock positions with large unrealized capital losses. At best, it’s “dead” money; at worst, it drops further in value and never recovers. Typically, investors believe the reason they have so many large, unrealized losses is that they bought the stock at the wrong time. They may also believe that it was a matter of bad luck, but seldom do they believe it is because of their own behavioral biases.

1. Don’t Stocks Always Rebound?

A glance at a long-term chart of any major stock index will see a line that moves from the lower-left corner to the upper right. The stock market, over any long-term period, will always make new highs. Knowing that the stock market will go higher, investors mistakenly assume that their stocks will eventually bounce back. However, a stock index is made up of successful companies. It is an index of winners.

Those less successful stocks may have been part of an index at one time, but if they’ve dropped significantly in value, they will eventually be replaced by more successful companies. The indexes are always being replenished by dropping the losers and replacing them with winners. Therefore, looking at the major indexes tends to overstate the resiliency of the average stock, which does not necessarily bounce back. In fact, many companies never regain their past highs and some even go bankrupt.

2. Refusing to Accept Blame

By avoiding selling a stock at a loss, many investors do not have to admit to themselves that they’ve made a judgment error. Under the false illusion that it is not a loss until the stock is sold, they elect to continue to hold a losing position. In doing so, they avoid the regret of a bad choice. After a stock suffers a loss, many investors plan to hold onto it until it returns to its purchase price. They intend to sell the stock once they recover this paper loss. This means they will break even and “erase” their mistake. Unfortunately, many of these same stocks will continue to slide.

3. Neglect

When stock portfolios are doing well, investors often tend to them like well-maintained gardens. They show great interest in managing their investments and harvesting the fruits of their labor. However, when their stocks are holding steady or are dropping in value, especially for longer-term periods, many investors lose interest. As a result, these well-maintained stock portfolios start showing signs of neglect. Rather than weeding out the losers, many investors do nothing at all. Inertia takes over and, instead of pruning their losses, they often let them grow out of control.

4. Hope Springs Eternal

Hope is the belief in the possibility of a positive outcome, even though there is some evidence to the contrary. Hope is also one of the primary theological virtues in various religious traditions. Although hope has its place in theology, it does not belong in the cold, hard reality of the stock market. In spite of continuing bad news, investors will steadfastly hold onto their losing stocks, based only on the faint hope that they will at least return to the purchase price. The decision to hold is not based on rational analysis or a well-thought-out investment strategy, and, unfortunately, wishing and hoping a stock will go up does not make it happen.

Successful traders are great at not only finding opportunities but also managing risk by exiting losing trades early. Investopedia’s Become a Day Trader course will teach you how to minimize risk with every trade, as well as how to find opportunities using six unique types of trade ideas, with over five hours of on-demand video, exercises and interactive content.

Realizing Capital Losses

Often you just have to bite the bullet and sell your stock at a loss before those losses get bigger. Hope is not a strategy, and an investor has to have a logical reason to hold a losing position. What you paid for a stock is irrelevant to its future direction. The stock will go up or down based on forces in the stock market, the stock’s underlying fundamentals, and its future prospects.

Let’s look at a few ways of assuring a small loss does not become dead money or turn into a much larger loss.

Have an Investment Strategy

Having a written investment strategy with a set of rules both for buying and selling stocks will provide the discipline to sell stocks before the losses blossom. The strategy could be based on fundamental, technical, or quantitative factors.

Have Reasons to Sell a Stock

An investor generally has quite a few reasons for buying a stock, but typically no set boundaries for when or why to sell it. Don’t let this happen to you. Set reasons to sell stocks and sell them when these reasons occur. The reason could be as simple as: “Sell if bad news is released about corporate developments, or if an analyst lowers the price target.”

Set Stop Losses

Having a stop-loss order on shares you own, particularly the more volatile stocks, has been a mainstay of advice on this subject. The stop-loss order prevents emotions from taking over and will limit your losses. Importantly, once the stop loss is in place, do not adjust it as the stock price moves lower. It makes more sense to adjust the stop price when shares are moving higher.

Ask: Would I Buy the Stock Now?

On a regular basis, review every stock you hold and ask yourself this simple question: “If I did not own this stock, would I buy it today?” If the answer is a resounding “No,” then it should be sold.

Tax-Loss Harvesting Strategies

A tax-loss harvesting strategy is used to realize capital losses on a regular basis and provides some discipline against holding losing stocks for extended time periods. To put your stock sales in a more positive light, remember that you receive tax credits that can be used to offset taxes on your capital gains.

The Bottom Line

Taking corrective action before your losses worsen is always a good strategy. In investing, avoiding losses is not always possible, but successful investors accept this and try to minimize their losses rather than avoid them. Selling a stock at a loss and receiving a tax credit is one benefit you will receive. Selling these “dogs” has another advantage: You will not be reminded of your past mistake every time you look at your investment statement.

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Reading time: 10 minutes

is article will teach traders about why discipline and patience is important in Forex trading. It will provide tips on how traders can achieve the levels of discipline and patience they need, why traders should use a stop loss in Forex trading, and much more!

Countless traders enter the Forex market every day, but many of them fail. Some traders focus too much time on creating the perfect trading strategy, which leaves them with little energy to develop proper discipline. This approach is a recipe for failure, as it is far more important to have a trading plan you can execute, rather than one that is perfect.

If you don’t have an executable strategy, we recommend that you learn through our live trading webinars. Some traders fail because they fail to give risk management the due diligence it requires. Finally, certain traders quit too early, giving up when their strategies don’t produce the desired results right away. No approach will generate returns every time, and traders must keep this in mind.

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Rules of Forex Trading Discipline

Forex trading discipline involves:

  • Developing a successful trading strategy
  • Modifying it as needed
  • Executing the plan effectively.

Following through with one’s plan is an essential component of trading discipline. A great example of this importance is Jesse Livermore, a man that ‘TIME’ once described as being the “most fabulous living U. S. stock trader.” Livermore made a fortune following rules he created, amassing at least $100 million at the height of his career in 1929.

However, Livermore decided to break his own rules, causing him to lose everything on more than one occasion. To avoid meeting a similar fate, traders can follow some simple rules. There are three main rules in particular that are crucial to obtaining a basic understanding of Forex trading discipline. Once you are comfortable with following these rules, you may feel comfortable with trading on a live account.

Trading Plan Elements

A trading plan is the foundation for a trader’s success. There are many ways to create a trading plan, but the crucial elements include:

  • A list of trading instruments
  • Which signals will cause you to enter positions
  • Which signals will prompt your exit
  • Minimum duration of your trade
  • Maximum duration of your trade
  • Maximum number of trades per day, week, and month
  • Hours during which you will trade.

By listing the rules you will follow, you can not only develop your plan, but you can also cultivate Forex discipline. Be sure to mark any market analysis performed in your plan, to examine whether this analysis corresponds to the plan. Determine some key variables before trading. These variables may include, the trading instruments you will use, the entry and exit signals you will harness, and how frequently you will make transactions.

Source: MetaTrader 4 Supreme Edition – Demo Account – Things to track in your trading plan

After some time, you might feel tempted to relax a bit. Remember that there are many stories about traders who didn’t follow their systems, and suffered dire results. One such tale involves Nick Leeson, who has been called the ‘original rogue trader’. Leeson single handedly pushed Barings Bank (a U.K based financial institution established in the 18th century) into insolvency.

The bank uniquely employed him as chief trader, and also allowed him to clear his own trades. The latter responsibilities are typically split between different people, but Leeson was armed with both. When his speculative bets didn’t pan out, Leeson hid his losses in an error account. These losses exceeded £800 million in 1995.

Why You Should Use a Stop-loss

Most disciplined Forex traders use a stop-loss. Before opening any positions, you should know exactly where you will place your stop-loss. Once you set this up, you should never lower it to keep a position open. Keep in mind that the more transactions you make, the more you will encounter situations where you believe your losing position will become profitable.

Some traders have a hard time accepting failure, which can cause them to place bigger bets, and potentially incur bigger losses. For instance, In 2020 JPMorgan Chase & Co.’s chief investment office announced a loss of at least $6.2 billion tied to derivatives trading. Bruno Iksil led the office’s charge to set up complicated positions involving credit derivatives – placing bigger trades in response to the losses.

These positions grew so large that certain investors claimed they were distorting credit indexes. Amid this disruption, Iksil got the nickname ‘London Whale’. While you probably won’t be at risk of being in any situations like this – it illustrates the value of having a stop-loss to automatically close a position.

Setting a stop-loss takes the emotion out of the situation. However, while establishing a specific price and then sticking to it is integral to using stop-losses, you should take a different approach for setting take-profit points. If you are just starting out, it’s wise to establish a take-profit point for every trade, and then refrain from modifying it.

With more experience, you can start modifying your take-profit points – especially if you have also begun setting your stop-loss to generate profit. But regardless of whether you are a rookie or veteran trader – you should always know your profit target before you commit to a trade.

Trading Schedule

Source: MetaTrader 5 chart with the Session Map indicator available with the Supreme Edition plugin. Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Another important part of developing Forex trading patience and discipline is by creating and sticking to a trading schedule. If your strategy involves trading when the London markets open, don’t make transactions when they are about to close. But why is this necessary? You may not know about moves in other economies that could cause your unplanned trade to suffer a loss.

In addition to setting trading hours, you should determine how many trades you can make in a day, week, or month. This frequency is usually based on the type of trading style you use. The latter is due to intraday traders generally limiting themselves to a particular day, while medium-term traders create limits for a weekly or monthly period.

Patience In Forex

We’ve covered discipline, so let’s take a deeper dive into patience. While the two are similar, there are a few key differences. Most online Forex traders will occasionally feel tempted to close profitable trades prematurely, either to take-profits or to ensure they do not becoming losing trades. To overcome this inclination, you must exercise patience.

Let’s look at some specific steps to help achieve this objective. First of all, don’t be controlled by your fear. Once you commit to a trade, very little should cause you to second guess your decision. Each time you enter a trade, you should know the maximum loss you will allow, and the minimum profit you want to generate.

Market fluctuations are perfectly normal and should not prompt you to change course. Adhering to this best practice can bring your Forex patience to the next level. Next, be patient and learn the tools of the trade. For example, MetaTrader 4 is the most widely used trading platform in the world, despite its steep learning curve. Successful traders take the time and patience to get to know the tools that make the winning trades possible.

Another crucial aspect of patience is evaluating your winning trades. As your position approaches the take-profit level, you will likely want to close the position and take the profits right away. While following this approach yields profits quickly – it could also prevent your trade from generating a potentially larger profit. For example, instead of closing such a position, you could choose to set your stop-loss to the minimum accepted profit, and then change your take-profit to where you expect the trendline to hit. And don’t forget – you can do this more than once for each individual trade.

Discipline Equals Success

Long-term accounts require more rigid discipline. The key is to know when to trade, and when to avoid trading. Usually, smaller accounts need more significant risks and more trading, whereas bigger accounts require smaller risks and less trading. Always make sure to put extra effort toward providing accessible, factual analyses.

The point of these analyses is to give you excellent trading opportunities. In time, you will also learn about price action. It doesn’t matter if you trade systems or prices, you will surely benefit from price action. All you need to do is follow the tripod of successful trading – it won’t be long until you begin to see positive results.

Trade What You See

The beauty of Forex trading is that there are so many trading opportunities, so you will never feel void of setups. Let’s say you have difficulty finding good positional trades or countertrade opportunities. Why not trade breakouts instead? We’ve come across traders who only trade breakouts – and they’ve had great success with it. However, keep in mind that you can only switch to breakout trading at a specific time of the day.

Take Action

Now that you have learned how to cultivate Forex trading discipline and patience, it’s time to put that knowledge into action. Start by analysing the market and developing a trading plan for your first week.

  • Which trading instruments you will use
  • The signals that will prompt your entries and exits
  • Your stop-loss and take-profit levels
  • The maximum number of trades you want to make during a set time.

Then you can apply your knowledge via a trading account. If you don’t have one already, why not open a live account with Admiral Markets? or start by practising in a risk-free trading environment beforehand, by signing up for a demo account.

What’s more, once you’ve opened your trading account, you can boost the capabilities of your trading platform by upgrading to MetaTrader Supreme Edition for FREE! Gain access to global opinion widgets, FREE real-time trading news, technical analysis provided by Trading Central, and much more!

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

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About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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