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Guest Commentary: Learn How to Lose

Guest Commentary: Learn How to Lose

2011-12-22 02:00:00
Yohay Elam, Forex Crunch,
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Winning is fun and useful, but losing is also part of the game. Successful traders lose quite a few trades, but know how to minimize their losses and cope with the situation. In order to win in the long run, you often need to know how to lose in the short run and remain in the game.

Have you lost the trade? Analyze it. Analyzing doesn’t have to take place immediately. Perhaps you will find it more useful taking some distance from the actual trade. This will allow you to be less emotional and to analyze the trade without the emotional stress.

Trying to take revenge or entering getting desperate in any other form isn’t helpful.

What went wrong?

  • Did you indeed follow your plan? Perhaps you missed some calculation during the preparations. Perhaps you bent the rules and wanted to go ahead with the trade. Or maybe you made unnecessary changes when the position was open. Well, now you are aware of this, and your next trade will probably be a more precise one.
  • Is your plan satisfactory most times, and sometimes loses? That’s OK as well. Just be aware of that. Any plan, has its losing trades. A good plan doesn’t win every trade, but wins in the long run. This means that the risk/reward ratio is low enough, and that the win/lose ratio is good enough.
  • Do you need to change the plan? Before making changes to your plan or replacing it altogether, please check the two points above. If you are certain that you have followed your plan and that it isn’t just one of the normal losses, it is time for a change. 5 straight losing trades, given that the implementation was a perfect, is good enough for making changes.

Changes can include

  • Tweaking some of the parameters of your plan: You can backtest your losing trades. It’s not so fun digging into a failed trade and playing a hypothetical “what if” game. But applying the same “what ifs” to all the trades of the same type may yield a difference. Would a small change make a difference? Perhaps that’s all you need.
  • Switching to different currency pair: This is harder to examine using the losing trades, as currencies don’t have the exact same patterns. But if your currency pair used to trade sideways and now it has broken out and extended the trading range (or the opposite), perhaps the system will not work anymore.
  • Finding a new plan: Sometimes patterns change in all pairs, and sometimes your system wasn’t optimal in the first place. If you are certain that this is the case, it’s time for a change. Refusing to admit that a change is needed is quite common after believing that your system is successful. But we aren’t here for being righteous, but rather for winning. If the system isn’t useful, just move on.

Enough about losing. Have you won the trade? Analyze it as well. Was your win part of the system? Great. Was it by chance? Feel lucky and humble. Many traders become euphoric after winning a trade using their gut feeling. This means that they are on the fast lane to burning out their account. Being overconfident is also harmful.

This is the eight chapter of 9-chapter series about trading forex responsibly. This guide touches the key points of trading forex more responsibly and provides many practical tips that only help avoiding the pitfalls but also provide tools for balanced, successful and sustainable trading.

The whole series is available as an eBook which you can download by joining the newsletter at the bottom of each article on the site.

Further reading: 5 Most Predictable Currency Pairs - Q4 2011

By Yohay Elam, Forex Crunch

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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