One of the first things that you have to learn in Forex trading is accepting defeat. Although it is a part of the overall trading process, losing is something that many traders, both newbies, and pros have difficulty.
Think about it. Losing in a game where nothing is at stake is tough enough, but so much painful when there is money involved that you have worked very hard.
The reason behind the difficulty in coping with the losses lies with the lack of understanding rather than actual psychological problems. People who are experiencing loss misunderstand the negative emotions that are attached to them, which can cause anguish and despair. This eventually makes them quit Forex trading completely. People who cannot deal with the psychology of losing end up exiting the Forex trading business immediately.
In this article, I would like to address that lack of knowledge with losses. In the next paragraphs, I am going to talk about the four stages of loss in Forex, namely, denial, rationalizing, depression, and acceptance.
Do the terms sound familiar? They should because they are related to the four stages of grief. Do note, however, that they are applied differently in Forex. My desire is that by getting to know these four stages, you will be better prepared to handle the losses that come with trading.
STAGE 1: DENIAL
The first stage of loss allows you to deal with the losing trade. In this phase, you deny to yourself and others that your trading idea was wrong and that the loss was not your mistake. Reasons like “I was stop hunted” and “I didn’t care for that trade” are commonly used. There’s nothing wrong feeling the way, particularly if you are new. It a way to ease the blow your ego, survive the loss and move on.
STAGE 2: RATIONALIZATION
After the denial stage, you move on to rationalizing your trade setup. This is the point in time where you point out everything that right about your trade idea and do not even think about what you did wrong. You cite the suitability of your trading plan, profit target, stop loss, and entry point but totally disregard that you did lose the trade and made a mistake somewhere.
STAGE 3: DEPRESSION
At this point, you have already looked at the possible external reasons for your loss. You then turn inward and consider the idea that the loss was completely caused by your own doing.
Although it is reasonable to take responsibility for your loss, blaming yourself too much can be damaging to your Forex career if it leads to you consistently doubting you. You might ask yourself questions like “Is Forex trading really for me?” and “Why go on at all?” You could even wind up withdrawing yourself from the business altogether if you didn’t find enough reasons to keep pushing it forward.
Those who have experienced this kind of self-doubt can attest that the longer the losing streak is, the more intense the feeling of depression. In some cases, you could even see yourself thinking of pursuing other business ventures out there and giving up Forex trading.
STAGE 4: ACCEPTANCE
In this stage, you begin to realize that it is unhealthy to blame yourself for everything that went wrong. Even though you have accepted that the loss was partly your fault, you are also mindful of the fact that the Forex market is a wild, untamed beast and that there are plenty of market factors beyond your control.
Let me clarify though that acceptance is not simply about feeling okay about the loss. In truth, acceptance is more about aligning yourself with reality and realizing that the loss cannot be undone.
When you reach this stage, you accept that you have made some mistakes on your part but that there are also things you are unable to control. Some even say that acceptance is a mix of rationalization and depression, as you combine the two before you can move on.
At the end of the day, it is important to remind yourself that you can never truly reverse what has been lost but you can make up for it. One obvious way to do this is to have a winning trade and recover financially, but you can work on rebounding mentally as well.
You can come up with improvements for your trading strategy, exercise better risk management, or just figure out how to handle your losses better. Instead of just denying the loss, you have to move on, adapt and grow.