When you invest in something, it is always a risk. Sometimes the risks pay off and we get our money back with profit; other times they don't work out as planned which leads us down an unpleasant financial path - losing everything including all hope for future gains or earnings (and this could happen quickly). If things go wrong: 1) Know what happened; 2) Identify your strengths; 3) Avoid vengeance trading; 4) Protect your capital at all costs; 5)Develop strategies; 6) Follow through; 7) Don’t give up!
Do you remember being a child and finding money on the ground that someone had lost? You pick it up. You look around and see if the owner is anywhere to be found. No one is there. You look at the crisp $20 bill in your hand and you think you are rich. You are excited about the possibilities – perhaps you can get the toy you were saving your allowance to buy or maybe you can treat yourself and your friends to ice cream at the local swimming pool! You are happy and excited about your find. It’s a great day. These feelings are fantastic and feel good. You have new opportunities that did not exist moments before.
Flip the coin. Your dad gave you $20 for your allowance this week and you worked very hard for it. All week you did your chores- you washed the car, vacuumed the house, you put away the dishes from the dishwasher every day. You were planning to use the money to go to the movies with your friends, but you cannot find where you placed it. Your anxious and overwhelmed that you lost it. You search everywhere. You retrace your steps to no avail. Your money is missing. You are sad and disappointed that you can no longer have fun with your friends.
Fast forward life a few years. You are now an active trader in the financial markets. This can be a very rewarding and financially lucrative endeavor. Like the child in scenario one, you can feel that everything is right and wonderful with life when you are in the green. However, even the best investors will experience a large loss at some point. It is very hard to cope with the feelings and stress associated with a large financial loss. Like the child in scenario two, you will feel extreme disappointment and panic when you enter into the red.
1- Know What Happened
First and foremost, after experiencing a financial backslide, you need to understand what happened. Let’s be clear. You need to take a long, hard look at the situation to gain a total and complete comprehension of the cause of the loss. You need to ask hard questions to identify the root cause of the issue. Were there distractions that prevented you from seeing clearly? Were you not in the right mind state to adventure into the financial markets today? Did you not research your intended trades? Did you miss the fact that a company in your portfolio was reporting earnings? Were you not in tune enough with worldwide economic events? Did you experience a loss and try to compensate with over trading to get your money back, but in turn, ended up losing more? It is not until you gain a complete understanding of the problem that you can begin to identify solutions.
While taking this deep look into yourself, you should also look at your coping strategies. You need to make sure you are on a positive pathway rather than handling the situation the wrong way. What has happened, has happened. Now, it is time to deal with it. If you are trying to suppress the negative feelings, this may not be healthy. Let your feelings about the loss come to the surface. Talk to your significant other, your father, your brother, or a close friend about what has happened. See if they have any insight that is specific to you that would assist you in moving forward. Make sure you are not projecting the loss onto someone else. Blaming is an unhealthy coping strategy. Take responsibility for your error. You could create more negative feelings by irrationally yelling at your child for distracting you than taking ownership that perhaps you should not have gotten into a trade when you knew your child was there and was going to need something from you. Also, don’t have denial about the reality of what has happened. If you bought a stock that was a poor choice, do not hang onto hope that it will go up when the best strategy would be to get out before you incur any more loss. Instead, choose a positive route.
2- Identify Your Strengths
Focus on your skill set that has previously led to gains. When you were successful what was it attributed to? Did your patience and adaptability lead to financial success? Were you successful because you conducted an exuberant amount of research? Was your strength in your decision making capabilities? While focusing on your personal strengths, you will begin to feel better leading to a better mental place to get back into making solid, positive trading decisions.
3- Avoid Vengeance Trading
A trader's life is always filled with risks. A very negative pathway for a trader to follow with a great deal of risk is when you're out to seek vengeance. When a trader allows anger to take over their plans and strategies, they can quickly lose focus and start trading recklessly in an attempt to recoup losses. This is a very dangerous mindset to have, as it can quickly lead to even larger losses. Some traders try to protect their capital by never risking more than they can afford to lose. To violate this rule during an enraged trading spree could lead to irreparable damage.
4- Protect Your Capital At All Costs
In general, this is the most important rule of all when it comes to trading or investing. You need to protect your capital at all costs because if it is lost you won’t be able to trade anymore. This means that you should always use stop losses, downsize your trades when you are not sure, and never trade more than you can afford to lose. The market is always there. You can jump back in when things make sense to you. Stay disciplined and stick to your trading plan to protect your capital. This means that you should always trade according to your plan. Never let your emotions get in the way. Don’t make hasty decisions.
5- Develop Strategies
When you have gained back your mental strength, you can begin to develop strategies to make a come back. Yes, you have made an error, but the most important thing is you can learn from your mistake. Take your misfortune and turn it into a positive. Do not make the same mistake again. Create a set of trading rules for yourself so you do not enter down the same pathway again. By developing strategies for success, you will gain confidence in yourself. For example, if you do not have a plan, then you should not trade today. If the market is too volatile today due to world economic events, then perhaps you should be making the active decision not to trade today. You could include in your rule list to pre-define your risk or use hard stops to limit your loss. Also, do not exclude your mental health when creating your rule list. If you just had a significant life event occur, perhaps it may not be the time to trade. Focus on your life event. The markets will be there when you are mentally in a better place.
6- Follow Through
No matter what the list of rules and stipulations you created to prevent yourself from making the same mistake twice, this is your best effort to make an active choice to succeed. Following through will prevent you from walking down that dangerous, slippery slope that you do not want to slide down. History can most definitely repeat itself. So, by making the active choice to not allow it to do so, you will be in a better position.
7- Don’t Give Up
If you have been previously successful in the markets, do not let one backslide deter you. Do the hard work. Overcome! You got this!
Of note: If you see no way out, you may want to seek professional help. There is no shame in getting help when you are in a mentally depleted state and feel that no matter what you do that you will not overcome. Remember, there is always hope. Money does not define you as person and you can always change your circumstances and become successful.