Losing trades happen–to everyone–so as long as you follow your strategy, and executed the losing trade according to your plan, that losing trade doesn’t matter. A good trade or bad trade should not be determined on the result of the trade, but on whether you executed your plan correctly.
As traders we need to learn to almost appreciate our losing trades, as they may show us something that sets us up for the next winning trade. After a losing trade we need to be able to “get back on the horse,” and sometimes very quickly. Just because we lost on a trade doesn’t mean we shouldn’t take the next signal that comes along.
Don’t Skip Signals
Many traders still fail when they implement a winning strategy because they skip trades after a loss. Since I mostly trade with trends I find I win two or three trades in a row, and then lose one (sometimes two if there is choppiness or a strong retracement) as the trend reverses, then win another two trades or so if the new trend direction continues.
If a loss discourages you enough to skip a couple trades (possibly winning ones), you may end up getting back in the market right when another reversal is due. A valid signal is not nullified just because of personal mood. Although, if you are very emotional about something it is probably best to step away from trading and take the day off, since it’s very hard to stay disciplined when emotions are running high.
Get Back on the Horse
Getting back on the horse after a fall (losing trade) isn’t easy, but doing so will force you to let go of the losing trade and refocus on the market. If it helps, you can think of your losing trades as market probes which help you find the next winning trade. Today provided a great example–lose $145 on one of the trades I really liked the look of, to make $425 several moments later on a trade in the opposite direction. Would you take this trade-off several times a day, if someone offered it to you? You better, because that’s what trading is. Accept the loser, as it is the just the cost of making winners (which should be bigger than the loss).
The EURUSD had been strong during the European session and was continuing to show strength as the US market opened (when bright yellow turns to pale yellow on the chart below). After two runs higher and some hesitation near the top, I expected a deeper pullback. It occurred, and was strong enough for me to start looking for a short trade. The basic strategy employed is outlined in Forex Day Trades – October 7, with additional details in other forex day trading posts.
Figure 1. EURUSD Day Trade Examples – October 17
Entered a short trade near the upper band, but was stopped out for a loss of 3.5 pips. This stop could have been reduced slightly, but I gave it room to move as my expectation was for another move lower after the strong fall.
Instead, the EURUSD created a higher low, followed by a higher high, indicating a further decline was becoming remote, and instead the price could rally again, in alignment with the overall uptrend of the day.
Despite having just lost a trade, I took a trade in the opposite direction (went long near the lower band) based on the new evidence, and the uptrend did indeed continue.
My buy order was partially filled which gave me two positions in this case, so I exited the first at a Fibonacci level above the recent high for a 10.6 pip gain (had I not ended up with two positions I would have exited everything here), and then exited the rest for a 15.3 pip gain as the price consolidated a bit after the further run up.
There is an important distinction between getting back on the horse and “revenge trading”–where you try to find any trade you can to make your money back. Trading is about reading the market, and being able to adapt to new information. Losing trades occur, so don’t skip another valid signal just because you had a loss. If you are calm and willing to accept your loss, and another valid signal comes along, trade it. Only avoid trades if you are distressed, or, if you have multiple losses in a row you may want to step back and ask yourself why the losses occurred. Maybe it is just a choppy trading day and it is best not to trade, or you may not be executing your strategy as planned and therefore can rectify the situation.