When the Trade Doesn't Work Out

GET A HANDLE - Loss is a part of trading and as much as this is something we all know is a part of it, it's still a difficult thing to shake off. I find that as a contrarian, taking a loss is even more of a challenge, as the losses will come at times when you think the trade might even look better than it did when you initially took it. But you must get a handle on the emotion of losing or risk losing it all. This week's short position in the Euro didn't work out and it was a stinger. But when a loss like this comes, it's important that you have your head on right to make sure you're able to cope and move on. 

REASONABLE - The most important thing is to ensure that your emotional reaction is reasonable. What does this mean? Well, for one thing, it's ok to feel crappy about a loss. There is nothing wrong with that. At the same time, you need to feel crappy the right way. Whenever I talk about this area of trading, I compare it to someone with a regular work job. Whatever that job may be, the person goes to the office each day and returns home. Hopefully most of the days are good days, but of course, some of the days are bad days. But when this person has a bad day, their emotional reaction is proportionate to the bad day they had. They know they will get up and go back to work the next day and all will be well. They don't let one bad day turn their life upside down.

THE TWO RULES - Ok so how do you handle this? How do you make it so the losing doesn't turn you upside down and inside out? Well, it all goes back to my two rules of trading. First, you make sure that every time you pull that trigger to take a position, you are head over heels about it. This way, when a trade doesn't work out, you will have very little to feel bad about.  Second, you need to make sure you can hit the pillow at night. If you find you aren't sleeping at night because you are constantly waking up to check the status of your position, you fail the Pillow Test and need to dramatically reduce your size until you can sleep at night. This way, when you take that loss, you are staring at a manageable loss that you will be able to work your way through. 

TO EACH THEIR OWN - Since launching the JKonFX portfolio in 2014, we have had wonderful success. A lot of that success has to do with understanding how to control emotion and what it means to take appropriate risk. When people ask me about what type of risk that means, I always go back to the Pillow Test. Each person is different and each person has their own tolerance for risk. And so, I don't believe in a hard number to hold to when it comes to risk. I believe that if you can sleep at night, you are taking the appropriate amount of risk. For some that might mean trading a little more aggressively but not having any stress in doing so. If they can do this, their head is clear and they will be able to trade with confidence. For others, it means taking smaller risk so that they too can sleep well and see the market clearly.

So with all that said, I want to close up by suggesting that the next time you get into a trade because you really loved it - and that trade still doesn't work out - and you are forced to take a loss - give yourself a pat on the back and tell yourself that you made the best decision you could and you were as responsible as you could have been even though it didn't work out. If you do this, the emotional gain from this type of maturity and growth will far outweigh the monetary loss  from the trade and will make you a much better trader as you push forward. As far as our book goes, the setback from the Euro short has us in the red this month, but only down on net about 1%. Not so bad.