Although losing trades are a normal part of the trading process, it is something many traders – both beginners and professionals – struggle with.
I think the main reason why it is so difficult to come to terms with losses lies in the lack of understanding of their nature and effect on the psychology of trading rather than the actual psychological problems.
Today, I would like to talk about the four stages of losing in forex, which are denial, rationalization, depression, and acceptance.
Do the terms sound familiar? They should because they are similar to the four stages of grief! However, note that they are applied differently in trading.
The first stage: denial
The first stage of losing enables you to deal with the losing trade.
At this point you deny to yourself and others that your trading idea was wrong and the loss was not your fault. Reasons like “You stopped chasing me” and “I wasn’t really interested in this trade” are usually used.
There’s nothing wrong with feeling this way, especially if you’re new. It’s a way to soften the blow on yourself, survive the loss, and move on.
The second stage: rationalization
After the rejection, you move on to rationalizing your trading setup.
This is the point where you point out everything that is right about your trade idea and don’t even think about what you did wrong.
You quote the suitability of your trading plan, profit target, stop loss, and entry point, but you completely ignore that you actually lost the trade and made a mistake somewhere.
The third stage: depression
At this point, you have already considered all possible external causes of your loss. Then you turn inward and ponder the idea that the loss was your own doing.
Although it is reasonable to take responsibility for your loss, blaming yourself too much can harm your forex career if you constantly doubt yourself.
You may be asking yourself questions like “Is forex trading really right for me?” and “Why do you persist at all?”
You may end up quitting the business altogether if you don’t find enough reasons to keep moving forward.
Those who have experienced this kind of self-doubt can attest that the longer the loss, the more depressed they feel.
Some even talk about pursuing other opportunities and giving up on forex trading altogether!
Stage 4: Acceptance
At this point, you begin to realize that it is unhealthy to blame yourself for everything that went wrong.
Although you accept that the loss was partly your fault, you also recognize the fact that the forex market is an unbridled beast and that there are a lot of market factors beyond your control.
Let me make it clear though that acceptance is not just about feeling good about a loss. In fact, acceptance is more like aligning yourself with reality and realizing that the loss is irreversible.
When you get to this point, you accept that you made some mistakes on your part but there are also things you can’t control.
At the end of the day, it’s important to remind yourself that you can never reverse what you’ve lost but you can make up for it.
One obvious way to do this is to land a winning deal and recover financially, but you can work on bouncing back mentally as well.
You can come up with improvements to your trading strategy, practice better risk management, or just learn how to handle your losses better.
Instead of simply denying the loss, you need to move on, adapt and grow.