As a trader, you will inevitably experience losses. If you are still trying to avoid losing trades and searching for a perfect trading system, it’s time to let go of that idea. Losing is an inevitable part of winning, and it’s crucial to learn how to handle losses properly to make consistent profits.
Professional traders understand that losing money is part of the game. Unfortunately, many traders still fear losing money and become emotionally attached to their trades.
There are several reasons why traders become fearful of losing money, including a lack of understanding that a series of losing trades can still result in profitability, a general fear of losing money, and trading positions that are too large and risky.
By understanding and implementing the tips in this article, you can eliminate your fear of losing money when trading. This will allow you to become a confident and emotionally stable trader, leading to consistent profits.
Transform Your Fear of Losing Money When Trading
The fear of losing money is a natural emotion that serves a purpose in many aspects of life. Without it, there would be chaos in the world and in the markets. People have a right to be protective of their hard-earned wealth and property.
However, when it comes to trading, this natural defensive and emotional mindset towards money needs to be transformed and refocused.
Instead of being fearful of losing money, embrace the control you have over each trade. As a trader, you have complete control over the risk management of every trade using stop losses and position sizing. These risk management tools allow you to be in control of your money. Instead of feeling fearful about losing money, you should feel empowered and confident because you can predetermine how much you are comfortable with potentially losing before entering a trade.
However, simply using these tools to control your risk per trade is not enough to completely eliminate the fear of losing.
Ask Yourself These Three Crucial Questions Before Trading
If you experience fear or any other emotion when placing a trade, it’s time to be honest with yourself and ask three essential questions:
Do I have the knowledge and confidence to trade with real money?
If you’re trading your hard-earned money but lack confidence in your ability to analyze and trade the markets, you probably shouldn’t be trading. Fear of losing money often stems from a lack of trading strategy, plan, or journal, or a general lack of preparedness to risk real money in the markets.
Is my position size too large for my personal risk profile and per-trade risk tolerance?
Before entering a trade, you need to determine your per-trade risk tolerance, which is the amount of money you’re comfortable with potentially losing on any trade. This amount should be based on your overall financial situation and should be determined by thinking of yourself as a risk manager rather than a small-time trader trying to get lucky. Your trading mindset will influence your trading results.
Do I understand the mathematics of trading?
Understanding the math behind trading, especially risk-reward ratios, is crucial to successful trading. Most traders who are successful lose anywhere from 40 to 60% of the time, but with the power of risk-reward, you can still be profitable even if you lose more than you win. By answering these questions honestly, you’ll be able to trade with confidence and reduce the fear of losing money.
Accepting the idea of losing is crucial
It’s important to understand that losing can be beneficial as long as you’re cutting your losses quickly and recognize that you’re merely preserving your capital. Your successful trades will cover your unsuccessful trades with profit left over. This is where the power of your average risk-reward ratio over a series of trades comes into play, as we’ll see in the following case study.
Even highly profitable traders tend to lose more than they win. For example, let’s examine a case study with 14 trades and a win rate of just 43%. In other words, you lose 57% of the time and win only 43% of the time. It can be difficult to link the idea of “losing” the majority of your trades with earning money.
The image below reveals that successful traders may lose more trades than they win and still be highly profitable over a series of trades. As a result, losing money on any single trade should not worry you:
Believe in Your Strategy and Believe in the Math
The hypothetical track record above shows us that even with a 57% loss rate, we can still generate profits if we allow our winning trades to run to at least 2:1 reward-to-risk ratio and cut our losses at a maximum of -1R. Sometimes, it may be appropriate to take slightly less than 2:1 reward-to-risk ratio depending on market conditions, as seen with a couple of 1.5R winners in the example. The average risk reward ratio for this example was 1:1.75, but aiming for an average risk reward ratio of 1:1.5 or 1:2 can still lead to long-term profitability. The key is to ensure that all losses are limited to 1R or less and to trade only when there is a valid price action trading edge.
When you have a concrete plan and a roadmap for what you are doing, it becomes easier to accept losing trades, as you know you had a strategy in place and were following a logical approach. This can help reduce apprehension or fear in trading. Trusting your strategy and understanding the math behind it can also help boost your confidence in trading.
The “Sleepless night test”
The “Sleepless night test” is an effective way to measure your fear of losing while trading. It’s essential to recognize how you feel before going to bed when you have a trade in progress. If you’re constantly thinking about your trade or unable to sleep, it’s a sign that you’re still fearful of losing money. Here’s a simple rule to follow:
If you’re unable to sleep comfortably at night with your trades,
- You might be trading with a position size that’s too large or risking too much at your stop level, or
- You lack confidence and have no clear strategy.
Closing Thoughts
In order to succeed as a trader, it is crucial to overcome the fear of losing money or trades. This fear can prevent traders from taking advantage of high-probability trade opportunities and lead to constant self-doubt and sleeplessness. The first step in conquering this fear is to accept that losing money and trades is inevitable, and instead of trying to avoid them, we must learn to manage and contain them. This can be achieved by following the concepts outlined above:
- Master your trading strategy and have faith in it.
- Employ solid risk management by cutting losses at 1R or less and aiming for a risk reward of around 1:2 or more, and letting winners run to achieve larger risk rewards like 1:3, 1:4 or more.
- Trust the math and remember that even a 40% win rate can be profitable with an average risk reward ratio of approximately 1:1.5 or more.
By applying these principles and using the “sleepless night test” to gauge our emotional state regarding our trades, we can develop confidence and discipline as traders and overcome the fear of losing.