One of the best pieces of advice about trading came not from an investor but from a boxer, and that is that everyone has a plan until they get that first hit in the face.
Whilst neither stock market day trading nor trading using forex funding is literally like taking a haymaker to the mouth, the point remains that in a lot of high-pressure environments, a fantastic trading strategy is only as robust as the trader executing it.
If there is a sudden windfall or change in strategy, a trader needs to know when to stay the course and when they should aggressively pursue the advantage.
Likewise, if a forex trade ends up catching the market by surprise, a trader needs to know when to cut their losses, when to ride out the wave of uncertainty and avoid chasing after losses, spending good money after bad.
Learning how to handle a sudden change in a situation and avoid being overridden by emotional and instinctual responses is a critical part of becoming a successful trader, and whilst financial knowledge is key to planning a successful trade, financial psychology is critical to being a successful trader.
Some people fare with this innately better than others but there are techniques, exercises and mindsets you can follow to help boost your resilience through some of the highest-pressure situations you can find in the financial world.
Understand There Is No Reward Without Risk
A fact that is universally acknowledged in all forms of trading but especially with the narrow margins and high stakes of forex is that there are no rewards without risk. What goes up must go down, and as a result, every trader will have lost money on a trade.
Much like how every boxer will be hit in the face, every footballer will miss a shot and every cricket batsman will see the wickets explode behind them, losing should be seen not just as an inevitability but as part of the game.
After all, Michael Jordan missed over 9000 shots, 26 game winners and lost nearly 300 games in his career, and he is one of the greatest athletes in history. The greatest people in any field are never invincible or indestructible, but instead are people who dust themselves off and try again.
The key is to cover your spread and develop a strategy where you make more than you lose, or
at the very least keep sudden losses to a minimum.
Conversely, if you somehow hit the jackpot on a very risky strategy, resist the temptation to let it ride or get greedy looking for higher returns. This does not mean cash out immediately, but take a step back and consider your position and whether it is best to keep going with your rather than acting on impulse.
Think Holistically About The Bigger Picture
Related to the point above, your focus should always be on your overall trading performance rather than the result of individual trades. Even day traders are operating on a long-term plan, and that plan does not care about the number of wins and losses.
You can have a particularly bad run of luck, losing many trades in a row and having a few down days and still be on track on your equity curve and trending better than the moving average.
As with any long-term project or goal, trading should be treated as a marathon. There will be setbacks and there will be moments where you can easily feel stuck, but when you look at the bigger picture, you are faring far better than you expect.
Build Your Plan With Contingencies
The more you trade and network with other traders, the more you will understand the vital importance of contingency. After all, if you have a plan to deal with a slump or sudden whiplash in the market, having a plan to deal with as many situations as possible will help avoid panic moves.
The more you plan, the less you will be caught out in a situation and the less chance you will make an undisciplined or emotionally driven move, leading to a greater chance of making the best trade setup you can.
A mistake a lot of new traders make is assuming that a trading plan is set in stone when in practice the best and most effective plans are those that are flexible to the variables and uncertainties of the forex market.
Watch For Dysfunctional Coping Mechanisms
When facing a position that is suddenly hit with losses, a lot of people end up subconsciously reacting with mental coping strategies that can help someone cope in the moment but ultimately are unhealthy mechanisms that can cause traders to lose sight of the bigger picture.
The first one that is commonly seen is denial, believing that an investment that has suddenly made a huge loss will eventually rise again and thus it is better to hold onto a poor investment rather than cut your losses. This is the opposite mindset to have if you want to keep your money.
The next mechanism is projection, which is to try and blame someone or something else for the losses. Whilst it is important to explore the reasons why a trade went the way it did, particularly in instances when a market is prone to bad beats, sustained losses or overall losses may point to an issue with the strategy as a whole.
Finally, perhaps the most damaging strategy in the long term is suppression, where a trader bottles up all of their feelings about a loss, especially if the financial loss has tangible consequences for them and their family.
Focus On What Was In Your Control
In nearly every situation, there are aspects for which we have control and other parts where we are merely a passenger. In forex trading, this is even more so the case given that wider financial and geopolitical circumstances can affect currency prices.
What is in your control is your trading strategy, your research and your portfolio, and whilst it is important to explore the reasons beyond your control for why a trade succeeded or failed beyond your expectations, it is important to be realistic about your contributions and what you could do differently.
Be as objective as you can be and ask others if they have the time to look at where a mistake
could have been made.
Confide In A Support Network
Dealing with losses can be especially tough and it is essential to build up a varied support network made up of friends, family, peers and professionals, each of which can provide vital insight and help a trader find perspective when they feel they are struggling.
Your friends are not necessarily going to help with your portfolio but they are there to offer support, guidance and a shoulder to cry on. After all, regardless of the situation, your feelings about it are valid and deserve to be treated as such.
Your peers, particularly those in the same trading network as you or working for the same firm, will be able to help you see from a financial perspective what you can change next time to make an accidental success deliberate or avoid a large loss.
Finally, if you are feeling particularly despairful or took a loss particularly badly, it may be worth speaking to a therapist who can help you find perspective within a situation and teach exercises that can help build resilience.
Never Chase Losses
There is a famous story of a stock market trader who claimed to have a trading record of 445-1 but only because he would sell stocks the second they made a small gain and hold onto losing stocks forever. He has since declared bankruptcy and been imprisoned.
Ultimately, most traders suffer from loss aversion, where a loss feels far worse than a gain of the same amount, and why some people make the profoundly questionable move to spend considerable amounts of money to take on extreme levels of risk to make back a loss that is only on paper.
Because of loss aversion, even if you make that money back it will still feel like a loss, so ultimately it is best both financially and psychologically to take it on the chin, cut your losses and move on to the next trade.
As noted before, the long game is ultimately all that matters in the end. Losing a big trade is obviously not fun, but if you make it back through a sound and cautious strategy, it will not make a difference.
However, knowing that a lot of people are likely to be risk averse can help you to tailor your strategy to take advantage of how the market is likely to behave, which is a critical reason why shrewd traders can make money even in bear markets.
There is a fascinating paper on the subject of economic risk aversion that suggested that, on average, professional traders are less likely to be loss averse than the general population, so the more you trade, the less likely you will lose track of your ultimate goal.