Forex trader psychology: coping with trading losses

Reacting to trading losses

In forex trading, creativity and the desire to take risks increase exponentially during winning streaks. This is generally not the case when your hard work and the time you've invested are not leading to profits. Stress and the taking of unnecessary risks are frequent side effects after a series of losing forex trades.

Seasoned professionals know that losing is part of the game. No trade is a "sure thing". With this in mind, they don't hesitate to accept losses, knowing that if they continue to take calculated risks, they will eventually be successful. The professional forex trader always questions his or her every move and precisely analyzes the reasons for which he or she opens a position.

Beginning forex traders do not realise that losses are a normal thing. After a loss, they feel frustrated. Generally, because of a lack of both knowledge and experience, the beginning trader takes profits too early and cuts losses too late. He or she then wants to catch up as quickly as possible, recouping losses by increasing lot sizes and thus the overall risk taken. He or she then believes that if his or her trading technique generated profits in the past, there is no reason to change the approach. Negative thinking and overconfidence distract the trader from the rigourous conduct necessary to successfully trade over the long term.

 

How you should cope with a loss

If you followed your forex trading plan but the trade went bad, note down in a trading diary what market conditions were and the reasons why you made this trade. Then, focus your mind on something else, it is important to be fully released from this loss and mentally ready to trade with a fresh perspective. After the markets have closed, you can review this particular trade. Your trading system might not be perfect for all market conditions. If this is true, you will need to identify the market conditions that best suit your system. A trending market, a consolidating market, volatility levels...

If you didn't follow the rules of your forex trading plan, you must rethink your approach and find out what is wrong. The problem isn't your method, the problem is you, since you didn't follow your strict guidelines. Identify your mistake so that you don't repeat it. The most common problems faced by traders are psychological problems.

"Revenge" is a negative state of mind which often occurs after you've suffered a loss. Impulsive acts, uncalculated risk taking, feelings of being all-powerful, etc... are the result of a vengeful mindset. Instead of helping you get out of a rut, it can contribute to your financial decline.

Fear is often an impulse for revenge. Because of this fear, you can end up taking significant risks. This is often detrimental, and not just in the case of forex trading. During the recovery of financial loss, it is important that you take calculated risks and think realistically. It takes time to recover a large loss. Do not make large trades during a state of panic. Working at a steady pace and keeping your trading positions stable will allow you to prevent negative emotions from affecting your trading.

 

Remain optimistic, methodical, patient and realistic.

Don't let your emotions dictate your actions, analyse the reasoning that guides your decisions by keeping a forex trading journal. Rationally weigh the pros and cons of each trade before you invest your time and your money. For a beginner, the inital focus shouldn't be on making profits but on not losing money! Forex trading isn't a game, it's a profession that's difficult to master as it requires specific psychological qualities.

Previous: The forex trader's attitudeNext: How to remain objective when trading