Every trader experiences losses, the trick is to develop techniques which mean they don’t prevent you from reaching your long-term aims.
Financial losses are an inevitable part of tradingand investing, even for the most seasoned investors. Here, we explore ways to handle losses without letting them derail your investment strategy and find out how maintaining a balanced perspective can help you achieve your long-term investment goals.
Understanding Financial Losses in Trading
Why Losses Are Part of the Process
Losses occur because the prices of assets are inherently unpredictable. A myriad of factors combine to determine levels of supply and demand which in turn set the market price. Any one of those variables can change at any time and result in price moves which weren’t predicted by your strategy.
Common Causes of Financial Losses
Some of the causes of financial loss will be specifically related to your personal circumstances and analysis, but others will be experienced by other traders as well and relate to generic elements of behavioural finance.
- Poor Decision-Making: Strategic missteps, emotional decisions, and cognitive biases can often lead to losses.
Then there is the question of how you adapt to changing circumstances, particularly when markets are distressed.
- Market Volatility: The rate at which the price of a security increases or decreases can cause significant fluctuations in your portfolio’s value.
Some events which trigger losses are much more difficult to predict.
- Unforeseen Events: Global crises, political changes, or unexpected company news can all drastically impact market performance.
With the occurrence of losses being a case of “when” rather than “if”, it’s a good idea to develop a mindset which prepares you to react accordingly.
Practical Steps to Manage Financial Losses
There are practical steps you can take to help you prepare for the moment your portfolio P&L starts to fall.
Assess the Situation
When faced with a loss, the first step is to calmly evaluate the reasons behind it. Did market conditions shift unexpectedly? Were there flaws in your strategy? Or did an external event affect the markets? By identifying the nature of the cause, you can take appropriate steps to avoid similar losses in the future.
Tip: When learning from your mistakes, focus on factors which you have greater control over rather than surprise news events.
Adjust Your Strategy
Upon identifying the reason behind a loss, it’s crucial to review and potentially revise your trading strategy. This might involve diversifying your portfolio, adjusting your risk management tactics, or exploring different investment avenues. The key is to learn from the experience and make data-driven decisions.
Use Stop-Loss Orders
A practical tool to help limit potential losses is the stop-loss order. A stop-loss order is an order placed with a broker to buy or sell once the asset reaches a certain price. This can help investors limit their loss on a particular security position. On eToro, setting up stop-loss orders is straightforward and can be a valuable part of your risk management toolkit.
Keep a Journal
Keeping a trading journal can be an invaluable tool and significantly aid learning.
Emotional Resilience and Loss Management
With the occurrence of losses being a case of “when”, rather than “if”, there is value to be gained from developing a mindset which prepares you to react accordingly.
Staying Calm and Composed
Emotional control is crucial during periods of financial loss. Panic can lead to rushed decisions, often compounding the problem. Techniques such as mindfulness and taking breaks from trading can help maintain your composure. Remember, staying calm allows you to think more clearly and make more rational decisions.
The Importance of Perspective
It is vital to keep your losses in perspective relative to your overall goals. Investing is a long-term endeavour, and temporary setbacks should not overshadow your long-term objectives. Maintaining a patient and level-headed approach can help you navigate through tough times and stay committed to your strategy.
Learning from Losses
Every loss offers a learning opportunity. Analyse what went wrong and consider how you can avoid similar situations in the future. This continuous improvement mindset will help you become a more resilient and savvy investor.
Final thoughts
Losses in trading are not the end; they are opportunities to refine your strategy and build resilience, leading to long-term success. By understanding the causes of losses, adapting your strategies, and maintaining an emotional balance, you can navigate through the ups and downs of trading with greater confidence.
Head to the eToro Academy to learn more about the psychology of trading.
FAQs
- What is “doubling down”?
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Doubling down refers to the strategy of increasing your position size after a loss, in the hope of recovering the loss quickly. While it can be tempting, this approach can be risky and often leads to greater losses. It’s generally recommended to reassess your strategy rather than doubling down on a losing position.
- How Can I Prevent Future Losses on eToro?
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To minimise future losses, consider employing a robust risk management strategy, diversifying your portfolio, using stop-loss orders, and staying informed about market trends. Continuous learning and adapting your strategies based on past experiences are crucial.
- Is It Possible to Recover From a Major Financial Setback?
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Yes, it is possible to recover from a significant financial setback. The key lies in maintaining a realistic outlook, reassessing your strategies, and gradually building back your portfolio with well-considered investments. Resilience and a learning mindset play crucial roles in any recovery.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.