It can be argued that the most difficult aspect of trading for those new to the game comes not when a trade itself loses money but when another trading opportunity presents itself and the next trading decision actually needs to be made!
It can be a large task to forget the previous trade, collect your thoughts and make the next decision in an informed, rational manner.
***BUT the ability to do this is one of the main characteristics that separates professional traders from amateurs***
Structuring sound trades after experiencing a loss (or multiple losses) comes mostly as a result of managing reactions and looking at the bigger picture.
All traders experience unfavorable trades – anyone suggesting otherwise is either lying or has never actually made a trade with real money!
While it is possible for both a professional and amateur trader to have a similar outlook on the market, there is nothing to suggest that both of these traders will end with similar results.
Here, we will look at some of the reasons why this is the case.
Evaluating System Efficacy Rather than Focusing on Individual Trades
One of the key differences between the successful trade reaction management of professionals and those of amateurs can be seen when the successful trader focuses on the rationale behind the trading system rather than on the outcome of one specific trade. Of course, a single trade cannot make a trading career. Successful trading careers require a large number of individual trades in combination, so the outcome of any one instance is not going to be of large importance. So, when we place a larger number of trades, an individual losing trade will start to look much more insignificant.
When new traders approach the markets in this way, singular losing trades will be much easier to manage and much less distracting when you are going to place your next trade. This will also make it easier to exit trades once your accepted levels of risk are reached. In lieu of this, new traders tend to become married to losing trades (based on emotional and irrational reactions) and are unwilling to accept losses.
These problems come directly from the idea that each individual trade is much more important than it actually is!
Now, this is not to say that each trade has zero importance, but in all cases we much have some context in mind and take into account the broader picture:
**The next trade is simply part of a much larger whole, and even if the original idea is not successful, there will be many more opportunities to make up (and overcome) the loss **
Approaching the Market with a Professional Mindset
When looking to approach the market with a professional mindset both front end practices ( those taken before the trade is placed) and back end practices ( those taken after the trade is placed) must be calm, mechanical and rational in nature. Of course, as human beings, it is impossible to completely remove emotions from the equation but attention must be centered in this area and it pays to realize that accepting risk is a standard part of trading and you must be ready to not trade when the market if telling you the original idea was incorrect.
A professional trader is able to accept losses in a much calmer way because they are fully aware of the strengths of their strategies and how these strengths fit into their overall money management scheme. When we don’t allow our trading egos to get in the way, it is much easier to prevent a 2% loss that turns into a 5% or 10% loss if the market continues to move in the wrong direction. Larger losses like these are unacceptable for professional traders, so it pays to watch the signals and to pay attention to what the market is telling you.
Maintaining the Sustainability of Your Trading Career
When following these rules and in paying attention to this frame of mind, it becomes much easier to sustain the longevity of your trading career. If “being right” is what is most important to you (and you try to force a losing trade into profitability), it is highly unlikely that you will be able to remain active in the markets for very long.
Instead actively obey the trading rules. This allows traders to maintain an edge in the longer term by avoiding the old adage of “putting all of your eggs into one basket.” This is what occurs when we allow one trade to ruin a trading day (or week, or month) because we are failing to take the much larger picture into account.
This is a key difference between professional traders and amateur traders. A newer trader is only focused in the things that are directly in front of him (the open trade seen currently). Alternatively, the professional trader gives most of his attention to the trading plan at work. Luckily, these trade plans do not need to be overly complicated in order to be profitable. Indeed, most trading systems that are very simple and are still able to profit consistently over time.
So, when we avoid trying to “force” our trades to work in our favor (which, it should be clear, is impossible), and maintain a strict usage of favorable risk to reward ratios, it becomes much easier to relax when individual trades start to move in the wrong direction. To be sure, the level of calm that is experienced by professional traders might seem overly mysterious. It might seem as though these traders do not actually worry about losing money. But this is far from the reality. Instead, these traders understand that losses are a regular part of trading and that sound money management and a consistent trading plan will erase (and overcome) these temporary difficulties once the bigger picture is taken into account.