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You Made A Huge Trading Mistake - Now What?

Whoops: You completely bombed that full-size trade. It feels like the world is going to crumble! You’re an awful trader!

Right?

No, of course we know that isn’t true. These outlier big loss moments are usually not an issue with our trading strategy - However, how we deal with the mental challenges that come after these mistakes is important to the independent success of every trader.

Traders mess up all the time, and it’s going to happen again. Our trading mistakes are rarely as big as we imagine them to be, and they can serve as important lessons or humility checks. While it’s true that some trading mistakes are more significant than others — holding a losing position way beyond your stop loss or doubling down, for example — they don’t have to be the trading career-ending disasters we make them out to be. So take a deep breath, realize that we will live to trade another day and the world is not going to crumble, then figure out how to get through it. After all - emotional control and self composure are the hallmark of a successful trader.

One of the reasons we sometimes stick with trades we know aren’t working is the commitment bias, which is our tendency to let our past decisions and actions dictate how we behave now and in the future — even if we know we’re being irrational. According to the Decision Lab, a behavioral design think tank, we “tend to interpret evidence in a way that makes our past idea seem better.” Sound familiar?

Consider this scenario, which I am sure all seasoned traders can relate to: A trade goes against you - you hold the position beyond your stop loss, and next thing you know you find that you’re trying to convince yourself as to why the trade can still go in your favor! Whether it be price action or a technical indicator, your commitment bias has just enabled itself to superseded your rationale, which was telling you to accept the loss on the trade long before it got to its current state. As humans, we want to see ourselves as people who are consistent, and recognizing that a trading decision we’ve made was a mistake, or perhaps is playing out against us, shatters that image. Our brains (and our egos) are working against change here on multiple levels, compounding the difficulty to fix a major trading mistake.

“The embarrassment and blow to your self-worth can manifest in unlimited ways — and sometimes it feels like it’s manifesting in all ways — and our bodies’ response to failure can even mimic that of physical pain,” Oset Babur wrote last year in a New York Times article about learning from failure.

After you’ve gotten away from the trading desk to cool off, the first step to correcting a trading error is to be honest and critical with yourself and to acknowledge that it was indeed a mistake. Of course, this is much easier said than done, but unless we swallow our pride, there’s no way to move past it. The second step is just as crucial: Accept that it was a mistake, but don’t allow it to define you as a trader!

“Being overly critical of ourselves can increase anxiety about a setback. But overthinking, or ruminating on what happened, is like agonizing self-criticism on repeat,” Rachel Simmons wrote in The Times’s guide to overcoming failure. Studies have found that overthinking — asking questions like, “How could I have done that?” — can damage a person’s motivation and problem-solving skills. As you likely already know, staying mentally sharp, clear-headed and focused is essential to a day trader’s performance.

After coming to terms with your blunder and accepting that you made a mistake, the real work begins. Of course, no two mistakes are identical, particularly when it comes to trading. That being said, there are still ways to move forward.

If it’s possible, stop digging - If you haven’t already, consider closing the position and resetting. If this happens to be a mistake you continue to make, do whatever is in your power to stop making the situation worse. Holding onto losing positions (and/or holding trades that have broken your rules) reinforces a negative mindset. This negative mindset will cause you to break your rules yet again, compounding to even larger losses.

From there, the way out of this hole doesn’t come in huge, portfolio-altering adjustments and decisions — Too many traders quickly develop the “make it back” mentality after one of these outlier big loss moments. This reckless approach feeds right back into the negative mindset that likely got you here in the first place, and can continue to cause damage. Instead, focus on low-risk baby steps, and executing on your system/strategy well with reduced position sizing. The quickest way to get beyond a trading mistake (regardless if the mistake resulted in a big loss moment or not) is to direct our focus back to a rules-based trading strategy and to lock in a couple of winning trades. This will nudge you in the right direction to boost confidence and reinforce the positive trading mindset that is crucial to success and consistency.

Moving forward, continue to test the waters and trade with lighter size until you feel confident enough to return to your normal position size. We want to avoid diving into another mistake headfirst, so revisit your trade log or trading journal to assess how and why this mistake happened in the first place. Could it have been avoided? In my experience mentoring traders, trading mistakes can usually be traced back to one of two things: lack of a trade plan, or failure to follow their trade plan.

Recovering from major trading mistakes is never easy, and there are both internal and external forces working against us, including the biases that make us want to stick with bad trades. However, having an awareness of the obstacles in your way is the only path to getting around them.

How did you get around a major trading mistake? Comment below or tell me on Twitter @OpinicusHolding.