Tuesday, July 16, 2024
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How the four stages of loss apply to trading

by xyonent
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Losing trades is a normal part of the trading process, but one that many traders, both beginners and professionals, have difficulty with.

I believe the main reason losses are difficult to deal with is not due to any actual psychological issues, but rather a lack of understanding of the nature of losses and their impact on trading psychology.

Today I want to talk about the four stages of losses in trading: denial, rationalization, depression, and acceptance.

Do these terms sound familiar? They are similar to the four stages of grief and should be. However, it’s important to note that they are applied differently in trading.

Stage 1: Denial

The first stage of losses allows you to deal with losing trades.

This stage involves denial to yourself and others that your trading idea was wrong and that the loss was not your fault. Reasons such as “I was stop-hunted” or “I just wasn’t that interested in the trade” are usually used.

There’s nothing wrong with feeling this way, especially if you’re just starting out — it’s a way to soften the blow to your self-esteem, get over the loss, and move forward.

Stage 2: Rationalization

Once you have denied it, you can move on to streamlining your trade setup.

This is the point where you point out all the things that are right about your trade idea and don’t dwell on all the things that are wrong.

You cite the relevance of your trading plan, profit targets, stop losses and entry points, but completely ignore the fact that in reality you lost a trade and made a mistake somewhere.

Stage 3: Depression

At this point, you’ve considered all the possible external reasons that could have caused the loss. Now it’s time to introspect and consider the idea that the loss was entirely your fault.

It is natural to take responsibility for your losses, but if you continue to doubt yourself and blame yourself too much, it can be detrimental to your Forex trading career.

You may have questions like, “Is financial trading really for me?” and “Why do I continue doing it in the first place?”

If you can’t find enough reasons to keep moving forward, you may end up exiting the business altogether.

Those who have experienced this type of self-doubt can attest that the more losses you suffer, the more depressed you feel.

Some even talk about pursuing other opportunities and giving up on Forex trading altogether.

Stage 4: Acceptance

At this stage, you begin to realize that blaming yourself for everything that goes wrong is unhealthy.

Even if you accept that some of the losses are your fault, you also recognize the fact that the market is a wild beast and there are many factors beyond your control.

However, we want to be clear that acceptance does not simply mean feeling okay about the loss. In fact, acceptance is closer to coming to terms with reality and realizing that the loss is irreversible.

When you reach this stage, you are admitting that you have made some mistakes and that some things are beyond your control.

At the end of the day, it’s important to remind yourself that you can never fully replace what you’ve lost, but you can make up for it.

One obvious way to do this is to win deals and recover financially, but you can also work on recovering mentally.

You can improve your trading strategy, manage your risk better, or come up with a better way to handle losses.

Instead of simply denying the loss, we must move forward, adapt, and grow.

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A journaling tool that will lead to valuable performance and strategy insights. Easily add your thoughts and charts to track sentiment for each trade. Click here to see if it’s right for you!

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