The 4 Stages of Loss in Forex

Updated from its original posting on 2013-07-12

One of the first things that you should learn in forex trading is accepting defeat. Although it is a normal part of the overall trading process, losing is something that many traders–both newbies and pros–have difficult with.

Think about it. Losing in a game where nothing is at stake is tough enough, what more when there is actual money that you have worked for very hard is involved?

The main reason behind the difficulty in coping with losses lies with the lack of understanding rather than actual psychological problems. People who are experiencing loses misunderstand the negative emotions that are attached with them, which can cause anguish and despair. This eventually makes them quit trading forex altogether. People who cannot deal with the psychology of losing end up exiting the forex trading business quickly.

In this article, I’d like to address that lack of knowledge with losses. In the next several paragraphs, I’m going to talk about the 4 stages of loss in forex, namely, denial, rationalizing, depression, and acceptance.

Do the terms sound familiar? They should, because they’re similar to the 4 stages of grief. Do note, however, that they are applied differently in forex. My desire is that by getting to know the 4 stages, you are better suited to handle the losses that come with trading.

Stage 1: Denial

The first stage of loss enables you to deal with the losing trade. In this phase, you deny to yourself and to others that your trading idea was wrong, and that the loss wasn’t your fault. Reasons like “I was stop hunted” and “I didn’t really care for that trade” are normally used. There’s nothing wrong feeling this way, especially if you’re new. It’s a way to ease the blow to 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’s right about your trade idea and do not even think about what you did wrong. You cite the appropriateness of your trading plan, profit target, stop loss, and entry point but totally disregard that you actually did lose the trade and made a mistake somewhere.

Stage 3: Depression

At this point, you have already looked at all 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’s reasonable to take responsibility for your loss, blaming yourself too much can be damaging to your forex career if you consistently doubt yourself. 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 can’t find enough reasons to keep pushing forward.

Those who have experienced this kind of self-doubt can attest that the longer the losing streak is, the more the intense the feeling of depression. In some cases, you could even see yourself thinking of pursuing other business ventures out there and giving up on forex trading.

Stage 4: Acceptance

In this stage, you begin to realize that it’s unhealthy to blame yourself for everything that went wrong. Even though you’ve 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 isn’t simply about feeling okay about the loss. In truth, acceptance is more like 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 are able to move on.

At the end of the day, it’s important to remind yourself that you can never truly reverse what has been lost but that 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 simply denying the loss, you have to move on, adapt, and grow.

 

How do you deal with a trading loss? 

  • chesstrader

    Great blog.

  • Edison Guevara

    The psychology in trading is as important as the methodology, the management of risk and capital management … is difficult to understand until it happens.

  • Alex

    Money and risk management is one of the greatest practice/policy one must adopt in forex trading. There is nothing like perfect winning team. A good team does not win always but the margin of loss(es) must be curtained or managed. Brokers are not in the business to lose, you must adopt all the risk management principle to keep you in the show. But most inexperienced people bet the farm when they see a promising trade set up that later made a surprising u-turn.

    I have had my ups and downs and I there is no end to learning. With money and risk management principles in place even when you see a good trade set up, you will rule the forex world! That’s my believe and I will get there!

  • Absolom

    I am still a Newbie Trader but i have learned the hard Way, that it is just normal to you lose sometimes!&If your Strategie is okay and tested!It bring’s you only useless worries to doubt allways anything you have learned! Although if you have a good Moneymanagement&Leverage it can never realy hurt you to lose some Trades! (Sorry,for my terrible englisch! I’m a bit out of practise!)

  • Pipsychology Fan

    Perhaps I’ve missed the point here, but i’m going to share this anyway for the benefit of all…
    Whilst I, and I’m sure everyone, appreciates the general message of this article, I believe that you have over looked an incredibly important point and seem to show a complete lack of knowledge toward it.
    This point being…
    Losses are unavoidable.

    You state in ‘1. Denial’ that “In this phase, you deny to yourself and to others that your trading idea was wrong, and that the loss wasn’t your fault.” And then again in ‘4. Acceptance’ “When you reach this stage, you accept that you have made some mistakes on your part…”

    These are incredibly misleading sentences, one that to those readers who have not yet learnt the psychology behind successful trading might well lead them to do the one thing this article is trying to stop them doing. Quit.
    This article is suggesting that your trades are bad if you lose and you should “…come up with improvements for your trading strategy” on each lose!

    The truth is, you might have a ‘Gift from God’ trade, where EVERYTHING is telling you to short the market (for example). So you take the trade, but the bulls keep running… In this, albeit incredibly extreme, example; Your trade was NOT WRONG. You saw ALL the signals, but you would still have taken a loss.
    Whilst this particular scenario is of course unlikely, that does not mean it is impossible. The markets are neither ‘For you’ or ‘Against you’.
    They are NEUTRAL. And with time and practice you place your trades accordingly.

    The one thing this article did pick up on is risk management!

    Here is the key. Create a strategy where risk is managed to provide an edge over time. Takes trades where rewards are greater than the risk and make sure to cut your losses short. Let this edge play out over time. Stick to your strategy like superglue and don’t deviate, there will be many a time when you suffer loses despite your entry criteria suggesting that the trade would go otherwise. This does not mean your trades were “wrong” and you should compensate for this, it is just your equity taking a breather synchronously with the market.
    You must let the edge play out over time, and not let your mind get the better of you in times of drawdown, where doing exactly what this article suggests (“come up with improvements for your trading strategy…”) might get you in even more trouble.

    Create a strategy, with an edge (no matter if it might seem negligible) and let it work over a period of time, sometimes longer than you might expect. Risk manage your trades, and take advantage of the compounding effects that will eventually come your way.

  • yudi

    thank…i always wait every post from Pipsychology :D

  • genaro

    I’m new on trading for more than 7 years, but I know God is growing me step by step and I’m very sure of that. People who are coming to God, he is going to change their character in order to know how to deal with losses and do not fall in depression.For more, see “GGWO”. I’m happy with this business and I gained just a little.
    God bless you!

  • Alexander Ogomigo

    I see greed as the major challenge of newbie. but with good money management principle and discipline, you will make it at the end. I have had my ups and downs but I still have that strong belief in strong discipine

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