Trade Management: Overcoming the Fear of Loss
When it comes to effective trade management, overcoming the fear of taking a loss can be one of the biggest obstacles. Let's delve into strategies to address this hurdle head-on.
2 Truths and a Lie
Which of the following two statements do you believe to be a lie?
A: Successful trading is about achieving behavioural consistency.
B: Successful trading is ultimately defined by your £P/L.
C: Successful trading can only be achieved by an obsessive focus on your £P/L.
A is an inherent truth of trading. Consistency in the way you actively manage risk is fundamental to discovering and applying a trading edge.
B is also true. Anyone who tells you successful trading isn’t ultimately defined by your £P/L is probably trying to sell you something!
C is the lie. C is the conclusion that most traders draw from the inherent truths of A and B. However, successful trading is very unlikely to be achieved by an obsessive focus on your £P/L because it significantly hampers A – your ability to achieve behavioural consistency.
It is essential to understand that in order to overcome the fear of taking a loss, you must shift your focus away from P&L and towards behavioural consistency.
Achieving Consistency: 2 Essential Components
1. Have a Comprehensive Trade Plan:
Before you start trading, it's crucial to have a well-thought-out trade plan that you're confident in following. Your trade plan should cover every aspect of your trading process, including trade selection, trade execution, and trade management.
2. Standardise Your Risk per Trade:
Risk management is a cornerstone of successful trading. Standardising your risk per trade helps to protect your capital and helps you to focus on executing your trade plan.
Determine the maximum percentage of your trading capital that you're willing to risk on any single trade. This could be, for example, 1% or 2% of your total account balance.
Calculate the position size for each trade based on your predetermined risk percentage and the distance to your stop-loss level. This will help you maintain consistent risk across different trades, regardless of their volatility or market conditions.
Keeping Score:
After every trade, it's essential to evaluate your performance objectively. Here's how you can keep score and track your progress:
Evaluate Your Entry Criteria: Reflect on whether your trade met the entry criteria outlined in your trade plan. Did the market conditions align with your trading strategy? Did you enter the trade at the optimal price level?
Assess Your Trade Execution: Review your execution during the trade. Did you follow your predefined entry and exit rules? Did you execute the trade according to your plan, or did you deviate from your strategy?
Follow Your Trade Management Plan: Evaluate how well you adhered to your trade management plan. Did you stick to your stop-loss and take-profit levels? Did you adjust your position size or risk management strategy as the trade evolved?
Assign a score (+1 or -1) for each of these criteria after every trade to track your consistency and adherence to your trading plan.
Rewards: Give Your Chimp a Carrot
Few things beat the dopamine high of taking a profit, and few things come close to the crushing low of losing money quickly. Our chimp brain thrives in the rollercoaster ride that is trading, but it is preventing us from achieving behavioural consistency – applying the same degree of focus and risk management after a string of losses as after a string of winners.
A key element of overcoming the fear of loss is knowing when to look at your P/L and rewarding yourself for behaviours that are likely to lead to success in the future. Here are some reward ideas:
After Every 10 Trades: If your score is positive after every block of 10 trades, reward yourself with something meaningful, such as a leisure activity, hobby, or treat.
After 30 Trades: Take a step back and assess your overall performance. Look at the real scoreboard—your profit and loss statement—to see if you're making progress toward your trading goals.
Remember, the goal is to cultivate discipline, consistency, and resilience in your trading approach. Celebrate your successes, learn from your mistakes, and continue refining your trade management to become a more skilled trader.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80.84% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
2 Truths and a Lie
Which of the following two statements do you believe to be a lie?
A: Successful trading is about achieving behavioural consistency.
B: Successful trading is ultimately defined by your £P/L.
C: Successful trading can only be achieved by an obsessive focus on your £P/L.
A is an inherent truth of trading. Consistency in the way you actively manage risk is fundamental to discovering and applying a trading edge.
B is also true. Anyone who tells you successful trading isn’t ultimately defined by your £P/L is probably trying to sell you something!
C is the lie. C is the conclusion that most traders draw from the inherent truths of A and B. However, successful trading is very unlikely to be achieved by an obsessive focus on your £P/L because it significantly hampers A – your ability to achieve behavioural consistency.
It is essential to understand that in order to overcome the fear of taking a loss, you must shift your focus away from P&L and towards behavioural consistency.
Achieving Consistency: 2 Essential Components
1. Have a Comprehensive Trade Plan:
Before you start trading, it's crucial to have a well-thought-out trade plan that you're confident in following. Your trade plan should cover every aspect of your trading process, including trade selection, trade execution, and trade management.
2. Standardise Your Risk per Trade:
Risk management is a cornerstone of successful trading. Standardising your risk per trade helps to protect your capital and helps you to focus on executing your trade plan.
Determine the maximum percentage of your trading capital that you're willing to risk on any single trade. This could be, for example, 1% or 2% of your total account balance.
Calculate the position size for each trade based on your predetermined risk percentage and the distance to your stop-loss level. This will help you maintain consistent risk across different trades, regardless of their volatility or market conditions.
Keeping Score:
After every trade, it's essential to evaluate your performance objectively. Here's how you can keep score and track your progress:
Evaluate Your Entry Criteria: Reflect on whether your trade met the entry criteria outlined in your trade plan. Did the market conditions align with your trading strategy? Did you enter the trade at the optimal price level?
Assess Your Trade Execution: Review your execution during the trade. Did you follow your predefined entry and exit rules? Did you execute the trade according to your plan, or did you deviate from your strategy?
Follow Your Trade Management Plan: Evaluate how well you adhered to your trade management plan. Did you stick to your stop-loss and take-profit levels? Did you adjust your position size or risk management strategy as the trade evolved?
Assign a score (+1 or -1) for each of these criteria after every trade to track your consistency and adherence to your trading plan.
Rewards: Give Your Chimp a Carrot
Few things beat the dopamine high of taking a profit, and few things come close to the crushing low of losing money quickly. Our chimp brain thrives in the rollercoaster ride that is trading, but it is preventing us from achieving behavioural consistency – applying the same degree of focus and risk management after a string of losses as after a string of winners.
A key element of overcoming the fear of loss is knowing when to look at your P/L and rewarding yourself for behaviours that are likely to lead to success in the future. Here are some reward ideas:
After Every 10 Trades: If your score is positive after every block of 10 trades, reward yourself with something meaningful, such as a leisure activity, hobby, or treat.
After 30 Trades: Take a step back and assess your overall performance. Look at the real scoreboard—your profit and loss statement—to see if you're making progress toward your trading goals.
Remember, the goal is to cultivate discipline, consistency, and resilience in your trading approach. Celebrate your successes, learn from your mistakes, and continue refining your trade management to become a more skilled trader.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80.84% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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