Beware Of The Chain Reaction of Trading Losses 

So you have gotten started as an investor/trader.

You are working well and you are turning some profit and getting the thrill of some winning trades.

All is looking up and you are finding it a real thrill so you obviously keep going and take the bold step of increasing your level of risk and committing more to your trades.

All looks peachy and you keep going with your planning and executing until one day something goes out of plan. The strategy stops working, the markets have shifted and you lose.

This is all perfectly normal — it is what you do next that can set you up for failure or ensure you stay in the game for a while longer.

What Sensible and Experienced Investors/Traders Do

The sensible and experienced traders will stop, review and work out what has gone wrong and put in place some adjustments to try to ensure they reduce their losses and can get back on to a winning streak.

What Novice Investors/Traders Do

The majority of novices will just keep going, applying the same strategy that has worked so well for them until now. They will blank out the obvious and hope that their sheer optimism will get them through. Unfortunately, inevitably they will find they have a red sea on their trading account and this is known as ‘the chain reaction’.

Eternal Optimism VS Realistic Optimism

Art Linkletter once said, “Things turn out best for people who make the best of the way things turn out.’

For the investor/trader, this is the fine line between eternal optimism that will lead them to profits as they commit to the strategy that goes against the crowd.

  • The pessimist will be fearful of risking their money and miss a large proportion of the profits, though they are also less likely to set off a chain reaction.
  • The trader who succeeds walks the line and fundamentally remains optimistic, however, they bring another element with them – skepticism.

Skepticism means that the successful trader enjoys their profits, remains optimistic that their strategy will deliver and that the markets will move as predicted but they also anticipate losses. More importantly, they know that they can set off a chain reaction if they are not careful and so they manage their plan and keep an eye on their strategy and pause for thought when losses start.

At that point, the key is to verify whether it is clear that a change in strategy is required, other times it was just a blip and for now the strategy remains valid. It is possible for a trading plan to fail to deliver for no obvious reason.

➜ Related Article: What’s the Recipe for a Successful Trading Plan? (Let’s Create One Together)

The Difference Between a Successful Investor/Trader and a Novice

What sets a successful investor/trader apart from the novice or less successful is that they will review events and take lessons from a failure but they don’t bother dwelling on them.

They just move on and know that it is merely a fact of life and the nature of the markets that you will suffer losses. Based on their review they will make the decision as to how to move forward and do it. No hesitation in either sticking to the plan or changing the plan.

➜ Related Article: How to LET GO of a Bad Investment / Trade and Move On

So what can the novice do to put themselves in a position to learn without getting caught up in the negativity of losses?

The key is self-monitoring and establishing a routine that allows for it to occur on such a regular basis that it is not a scary process and catches issues before they escalate. One of the most helpful items is a trading diary where you record trades, market conditions, thoughts about why you chose ‘Action A versus Action B’ etc.

This serves two purposes:

  1. The first one is as a quick double-check that your thought processes make sense
  2. The second is to have a record when you look back and try to verify what works and possibly where the thinking process was flawed.

It is amazing what can be thrown up if you review all the details of your trades and compare the successes versus those that failed to evolve as planned. It is not unusual to discover that you frequently fail to perform at particular times of the day such as opening or close.

For an investor/trader to be successful they need to make the most of their talents.

So what you need to do is be prepared to verify and double-check what does or doesn’t work for you. Review losses especially and pause for thought every so often to ensure that you don’t fall victim to the chain reaction. Don’t be afraid of it, just step back and see it as an opportunity to regroup and review.

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Effective Trading Solutions Pty Ltd t/as is a Corporate Authorised Representative (CAR No. 1267698) and Terry Tran is an Authorised Representative (AR No. 1267697) of Australian Financial Advisory Group Pty Ltd (AFSL No. 475300).

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