Developing Emotional Resilience: Bouncing Back from Losses

3. Juli

Okay, fellow TradingViewers, it’s time we tackle a topic that may make you a bit uncomfortable. But, rest assured — it’s for your own good! Today, we explore the realm of emotional resilience and, more precisely, how to bounce back from losses.

Losses are inevitable. Ask anyone — even the big dogs in the industry have gone through painful losses (as you’ll see at the end of this write-up). Drawdowns so severe that they’ve nearly put hedge funds out of business (just ask Ray Dalio). And yet, bouncing back from losses is what has helped these one-time losers to develop emotional resilience and make the best out of the experience.

Acknowledge the loss, but don’t overblow it

Accept that losses happen and they’re a natural part of the trading journey. No matter how skilled or successful you are, you will have losing positions every once in a while. First, make sure you find out what went wrong. And second, don’t dwell on the losses too much and don’t let them cloud your prospects of becoming a better trader.

Size your positions according to risk tolerance

Never let a single position wipe out your entire account if it turned against you. We know how attractive it is to bet big on currencies swings spanning European countries. But keep in mind that, in such case, the old market adage "You're as good as your last trade" will hold true and it may not be pretty.

There are two main ways to prevent the wipeout of your account with a single trade — don’t bet too big (or use too much leverage). If you do bet big, make sure you have a tight stop loss that won’t let your balance get washed out and drawn underwater. Always think about defense before you think about offense.

Let your strategy take care of your trading

You won’t have to be emotional if you let your strategy take care of your trading. Having the right trading plan will eliminate the need to react on the spot and make rushed decisions out of emotion. A solid strategy can empower you to withstand even the harshest market conditions with your chin up and trading account unscathed.

Embrace the power of habit and routine

In trading, consistency is key. Create for yourself a nice and easy-to-follow trading routine. This may include making your cup of coffee before you sit to do some chart reading. Or get a workout in before you read the daily news. Whatever will help you stay disciplined and emotionally balanced — do more of that.

Invest in yourself and then trade the markets

Your most valuable asset isn’t your trading account — it’s you. Invest time in learning, reading, watching interviews of successful traders and financiers. Read books on finance and trading, study the economic calendar, or sign up for a paper-trading account to test your trading skills risk-free. The more knowledge and practice you soak up, the more resilient and prepared you will become.

Know when to step back and get a break

Sometimes, the best thing to do after a loss is do nothing at all. It’s understandable if you feel emotionally unstable, off-kilter and overwhelmed when the markets gives you a slap in the face. Especially if you’re just starting out in the volatile trading space. What to do then? Unplug, unwind, recharge. The market will still be there tomorrow — go touch grass and come back with a refreshed perspective.

Celebrate the wins — no matter how small

Trading has to be about more than just coping with losses. Give yourself a nice pat on the back for every little victory. Made a successful trade? Or even got out at breakeven thanks to your stop loss? Perfect. Recognize and celebrate these moments. They’re little milestones to remind you that you’re on the right path to success.

Loss advice from the big dogs in trading

Let’s wrap up some with loss advice from the world’s best traders and see how they dealt with the blows of Mr. Market.

Paul Tudor Jones, hedge fund manager: “Losses are not your problem. It's how you react to them. Ignore losses with no plan, or try to double down on your losses to recoup, and those losses will come back like a Mack truck to run over your account.”

Ray Dalio, founder of the world’s largest hedge fund Bridgewater, on how he viewed a near-bankruptcy experience: “I needed to balance my aggressiveness and shift my mindset from thinking ‘I’m right’ to asking myself, ‘How do I know I’m right?’ It was very, very painful, yet it changed my way of thinking. It was one of the best things that ever happened to me.”

George Soros, pioneer of the hedge fund industry: “It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”

Let’s hear from you

How do you usually deal with a trading loss? What’s the best thing a loss has taught you? Comment below and let’s spin up a nice discussion!