Your first loss is your best loss; if you try to get it back in a vengeful way, everything can go downhill for you very quickly. Stemming this negative tide can take a lot of self-control, so if you have an undisciplined personality by nature, this is what could make or break you as a trader. I typically communicate with hundreds of investors and traders each week and one of the most troubling things that I see is when a trader loses on a given trade and then doubles up or more on the next trade trying to make back the loss and trying to make the profit that they missed out on when the loss occurred. When this strategy works out, it can work out very well, but when it does not work out, it can be a nightmare, unnecessarily draining your account of the cash that it needs to move your trading business forward. This type of reaction to a loss is almost purely emotional, sometimes it occurs out of ego and sometimes it occurs out of anger, but it always occurs out of a lack of discipline or self-control.
One of my basic business beliefs is that there is no room for emotions in a business situation and, since trading is a business, removing the emotions from trading decisions seems like common sense. Many traders have big egos by nature. If they have taken the initiative to learn to trade, they are likely self-motivated people. Since trading is something that you can do on your own without relying on others, it is very appealing to independent-minded people. These are good traits for traders to have, but when they cannot keep their emotions or their ego in check, it can lead to a lot of problems. When a trader takes losing trades personally, it is when things can spiral out of control.
The market isn’t out to get anyone; in fact, the market couldn’t care less about any of us, so when we make a bad decision and we lose on a trade, or when we do everything right and the trade still doesn’t work for us, it isn’t anything personal. Trading is a business and all trades are just business decisions, some work out well and others won’t. When a trader gets angry at the market and trades to get revenge from an earlier loss, it rarely works out well. Typically, what will happen is that they will make mistakes or look for a setup that really isn’t there. The point is that the trader is likely entering the market at a time and a place that they shouldn’t be entering at all and they, very likely, have the wrong mindset that it takes to succeed. They are looking to get even and they are looking to take it out on the market, but what will often times happen is that, instead of doubling up on a winning trade, they double up and lose again, compounding their problems and frustrations.
Trading from a conceptual standpoint is very simple – we look at the charts based on whatever time frame we are trading on and we will see that there is either a valid setup or there isn’t. If there is no valid setup, we move on and look at the market again at the end of the next period, but if there is a valid setup, we enter into a position based on our trading method. It’s not complicated and there is no gray area around this, either there is a valid setup or there is not. Regardless of how devastating your last loss may have been, it should have no impact at all on your future trading decisions. Apply the same method to the same market, in the same way, using the same rules for position sizing, and simply move forward. Sometimes you win and take some money from the market and sometimes the market wins. All you can try to do, as a trader, is to win more than the market does.