Lately, the stock market has entered the public consciousness as a world of opportunities, rife with ups and downs that can boost your wealth.
But no matter how well you plan, it is inevitable that you will suffer from losses at some point or the other. Even the most dedicated traders suffer from a lapse in discipline occasionally and end up in financial losses.
While sometimes it may be a sustained bleed out of your planned trading capital, at other times, it can be a simple technology meltdown.
It may be possible to cut down on losses by planning well in advance, but it is practically impossible to ensure that you will never suffer from any loss whatsoever.
In such a situation, the best thing that you can do is to prepare for loss mitigation.
What Is Loss Mitigation?
Loss mitigation is the process of minimizing the loss and repairing the mental damage you undergo.
Most traders start questioning themselves after a significant financial loss (or a losing streak), leading to fear.
Fear is binding and causes one to get out of trades too quickly, skip trade opportunities because of lack of confidence, holding on to a stock for too long, and other such blunders.
As a thumb rule, one must remember to set stop losses in a way such that you do not lose more than what you would make on a winning day.
For example, if your average profit on winning days is $1000, make sure that you do not lose more than that on any given trading day. Thus, you won’t be in a situation wherein you struggle to get back your confidence.
Despite your planning, there may be times wherein you end in losses that shake you to the core. Here are 6 loss mitigation techniques that will empower you to survive those days.
1. Accept Responsibility
Irrespective of whether it was a bad day, a single large loss, or a life-altering mistake, the first step is to accept responsibility.
Many newbie traders live in denial and blame their algorithmic stock trading methods, timing, external influences, and others. Even pros show a bit of a fixation on what, how, and why things went wrong.
While these may be valid reasons, you need to understand that you are signing up for the risk involved by putting money in the stock market.
When you run into a loss, take up ownership and evaluate what you could do differently. The sense of responsibility is what will prevent you from taking uncalculated risks in the future.
2. Get A Perspective On Your Loss
While you should figure out how you ended up in a loss and come up with corrective measures to avoid such occurrences, you need to realize that you are more than your trades.
It’s natural to want to ascribe meaning to something so horrible in your life. But failure to put your loss into perspective may result in depression and cause you to give up on your trading future altogether.
To mitigate the loss and prepare for better days, you must know how to put your loss in perspective when the chips are down. The market is always available, and you will find new opportunities.
3. Take A Break And Plan
Planning sounds staggeringly boring to many, but it is necessary to survive the rise and fall of the market.
Planning can include setting up backup data connections, changing markets, or establishing a platform to liquidate trades on hitting the stop loss.
After a major loss, you need to review all the events to identify the point where you went wrong. Keeping a written record of your trading history can help when going all the way back to assess your mistakes.
Such proactive measures ensure that you do not run into similar losses in the future. This may also be the perfect time to evaluate your risk appetite and chalk out the things you would do differently.
4. Realign Your Focus
Most stock market losses can be traced back to over-confidence, and chances are you were walking on the same path, and the market has put you in place.
It is from here that you need to restart your journey by developing healthy confidence. Start by realigning your focus to creating trading plans. Imbibe a sense of rigidity in your rules and build your self-discipline.
As you get back to learning and creating a strategy that consistently makes money off your strategies, you will slowly and steadily mitigate the losses.
5. Return, Inspired
A stock market loss is an excellent learning lesson; the more mistakes you make, the faster you learn. While it is acceptable to make mistakes, you need to ensure that they inspire you.
Just like sportspersons get excited about learning about a weakness in their game, you need to use the loss as a catalyst to improve your trading game.
6. Start Small
After a major loss, the best course of action is to start small and trade on small position sizes. Winning a few small positions will slowly build your appetite for trading.
You can then focus on incrementally increasing your positions. That way, even if you happen to suffer a loss, it will not be a major blow to your confidence.
If you are beaten up about the loss, you can consider spending a week in free stock api based simulation. You can take your time in getting to active trading and gradually reach the levels you traded in the past.
To Wrap Up
The key to coming out stronger is mustering the confidence to get back to the game. Each stock market loss makes you better prepared than what you were, and you emerge a mentally stronger trader.
It is the way one deals with losses and rises above them that sets a mediocre trader apart from an exceptional one.
So, while you should take all possible measures to tread carefully, do not shy away from getting back to the game once your recovery work is over.
Put your good intentions in practice, let go of the loss, and usher in higher trade gains.