Dealing with Stress and Coping with Losses in Forex

Forex trading is inherently risky. And where there is risk, there is also stress because it is natural for humans to feel uneasy when involved in risky behavior. However, levels of stress probably vary a lot between different traders. It is also likely that different types of trading events exert different level of stress on traders.

The role of stress in Forex trading

Getting rid of stress entirely is probably impossible and could be even harmful in trading. It is useful to experience bad emotions when you make a mistake — it helps you to avoid it in the future. The problem with FX trading (and any other financial trading) is that not all stressful events are results of mistakes. A good strategy with a winning rate of 50–60% and an average risk-to-reward ratio of greater than 1:1 will result in 40–50% losing trades. It would be totally normal for any human being to feel anxious about each one of those losses, but it wouldn't be useful to a Forex trader. Those losses are a natural part of the trading process. At the same time, one would be right to be stressed when a trade executed by a mistake ends up profitable by pure luck — it is really difficult to experience anything but joy in that outcome, but from the trader's perspective it is a very harmful thing to do. While learning to cope with stressful situations is necessary if you want to have a career in foreign exchange trading, it is also necessary to admit that traders need stress to become better traders.

In the ideal case, stress helps us to be disciplined and commit less mistakes in trading. In reality, traders may experience lots of needless stress that doesn't help us at all. Some traders — mostly newbies who have just transitioned from demo to live trading — worry almost non-stop while they have an open trade in the market. Even experienced traders may still feel depressed on a particularly long losing streak in spite of the fact that such streaks should be expected given their strategy's win rate.

Increased volatility in a currency pair you trade, unexpected fundamental or political news announcements, slippage and widened spreads, brokerage platform outages, fat-finger errors — there are many factors that could make a Forex trader nervous. At worst, too much stress may cause a serious illness or condition, or even make you abandon trading altogether. That is why it is so important to keep stressful situations under control and your reaction to such events in check.

Lots of traders feel stressed when losing a trade that was sized to be much larger than their trading plan dictated. Usually, it is a good sort of stress. It reminds them that they should always follow their position sizing guidelines and rely on prudent risk management.

Coping with losses

Sooner or later, every FX trader gets struck with an unexpectedly big loss or a line of such losses. Sometimes, it is just the matter of time and trader's reaction to the resulting emotional and economical drawdown.

The first thing to do is to get rid of the bad emotions. There are many ways to loosen your mind and to stop thinking about the incurred loss. Getting an emotional discharge through alcohol (do not mix it with trading!), sports, computer games, mediation, or prayer is a common method employed by thousands of traders — both professional and part-time ones. In the worst cases, a trader might decide to start seeking professional psychological help to help coping with the problems.

Often, especially if the trader failed to channel their negative emotions through something other than the market, there is an attempt to get a revenge on it. Revenge trading is a futile and often perilous endeavor, which is akin to overtrading and leads to even more disastrous results.

Taking a break from trading — short or long — might prove to be a great remedy in and of itself. It will help you to stay away from the revenge trading and will also heal your emotional wounds caused by a recent streak of losses. A good idea may be to increase the time spent on learning, reading books and doing all sorts of market analysis. Though, there should be some bounds to it too.

Switching strategy (to a new one) may also be a good idea, but only if you are sure that the resulting loss was a direct consequence of employing your current strategy, and that the same or worse may repeat in the future. In a milder case, switching to a smaller position size would probably be a more prudent solution.

Losing everything is not the end of the trading way for some traders, especially so for gamblers. They will just go to a bank and get a loan to cover their losses and probably make some new. Needless to say, trading on borrowed funds is a thing that should be avoided unless you really know what you are doing. But if you knew, how did you end up with such a huge loss in the first place?

Going off the market for some time is probably the most logical step when coping with a large loss. If the losses seem systematic, changing a trading strategy or some specific parts of it might be due.

If you want to talk about how you deal with big losses in Forex trading, please feel free to do so using the form below.

What exactly is causing stress in Forex trading? What is the most stressful part for you? How do you cope with it? What do you do when losses exceed your most scary expectations? Discuss this on our community forum!