In today’s episode, you’ll discover why your losses are larger than your winners—and how to fix it.
So tune in right now…
Hey, hey, what’s up my friends? In today’s episode, I want to discuss why your losses are larger than your winners.
Some of you might have encountered this problem, “Man, whenever I put on a trade, my losses are always larger than my winners, what’s going on? This is a conspiracy! The market is rigged against me! There’s stop hunting! What’s going on?”
Well, there are a few reasons and I’ll break it down for you step by step what they are and how you can fix this problem.
1. Humans are not wired for trading
If you think about this, if you put on a trade and the market moves against you, what’s your thought process? You probably would think, “Man, I don’t want to take this loss on the trade, let me hold onto the trade a little bit longer.”
Then the market continues to move against you. At this point, you regret it, “Man, I should have just booked a small loss, now the market is even further against me! If only the market moves slightly in my favour, I’ll get back to breakeven, I’ll be a good boy and I’ll exit the trade.”
Afterwards, the market collapses even more against you. At this point, you are flustered, you’re panicking, the loss is so much compared to the size of your trading account. You’re down 50% of your account.
Now the pain is near its maximum and you cannot take it anymore, so you exit that trade. That kind of explains why you incur large losses. And even if the next few trades are in your favour, the loss that you incurred a few trades earlier is still lingering, the emotions are still raw.
When the market moves slightly in your favour, you’ll tell yourself that you won’t want to watch the winner become a loser because you don’t want to encounter another loss that you’ve just experienced.
So what you will do is that you’ll quickly take profits on small winners and that explains why in the grand scheme of things, it’s common to see that you have small winners and large losers because of this kind of like psychological make-up that you have as a trader.
It’s perfectly normal. Many traders will experience this and it’s kind of like a rite of passage to becoming a profitable trader, so don’t fret about it.
2. Your risk and reward are inversed
What you might have is a very wide stop loss relative to your target. For example, you have 200 pips stop loss while your profit target is maybe 20 pips. In this case, clearly, your losses will be larger than your winners.
Yes, you will have frequent winners of 20 pips, but there will come a point where the market didn’t even give you 20 pips but instead, it moves 200 pips against you, where your losses will be huge.
All that is because your stop loss is wider relative to your take profit level. And this is something that attracts a lot of forex traders into those ‘Expert Advisors’, trading robots and stuff like.
It’s precisely because they have a very nice and smooth upward sloping equity curve with almost no drawdown. But when that 200 pips drawdown or when the losses occur, you can see that it wipes out a huge chunk of the profits or even more. That’s the second thing.
3. You are trading against the trend
Think about this, if you are trading against the trend and you are not sharp with your risk management, if you don’t hit your stops fast enough, then when the trend continues higher, and you’re not fast to bail out of a trade, your loss can be pretty huge.
Because if you’re trading against the trend, it means that you are shorting in an uptrend. And if the trend quickly resumes and breaks out to a new high, you can see that your losses can escalate pretty quickly.
As a counter-trend trader in an uptrend, your profits are somewhat limited to the depth of the pullback. If the pullback is shallow, you can see that your profit potential is pretty little.
This is another reason that if you’re trading against the trend, your losses will be larger than your winners.
What you can do about it
The solution is:
#1: Plan your exit
Because if you don’t plan your exit, then your psychological makeup and your trading psychology will lead you to incur large losses. And the reason is because you don’t want to lose, so you end up holding it too long and you suffer a huge loss.
Whenever you put on a trade, promise me that you have planned a stop loss that you will adhere to no matter what. Once your loss is contained, then the large losses should be pretty much reduced to a minimum or even non-existent anymore.
The key thing is to have a planned exit, have a stop loss and adhere to it. I can almost guarantee that your large losses will be eliminated.
Not completely, because sometimes you might break your rules. So use proper risk management and don’t risk more than 1% of your account.
#2: Define your potential risk-reward on the trade
Let’s say the market is in an uptrend and it comes into an area of support and you want to buy at support. Let’s say your stop loss is 50 pips, that’s fine.
The next thing you want to do is to ask yourself, from your entry to the swing high, how much profit potential is there. And the reason why I referenced the swing high is because the swing high in an uptrend is likely to face some selling pressure.
There’s a good chance for the market to move to the swing high from support, as the swing high has potential selling pressure coming in to push the price lower.
Let’s say your stop loss is 50 pips. Then the next question to ask yourself is, “From my entry point to the swing high, do I have enough profit potential to justify taking that stop loss?”
Because from the entry to the swing high, let’s say it’s 25 pips and you’re risking 50 pips to make 25 pips, then from a risk-reward standpoint, you’re risking $1 to make 50 cents. And if the market hits your stop losses, in the long run, your losses will be larger than your winners.
What you want to do is to make sure that from your entry point to the target profit, be it a swing high or resistance, you want at least a 1:1 risk-reward, depending on what’s your minimum.
If you risk 50 pips and your profit potential is at least 50 pips, then your losses and winners will pretty much be of similar size. Let’s say you risk 50 pips to make 50 pips, then you’re risking $1 to make $1.
Or let’s say if your swing high is 100 pips away and you’re risking 50 pips to make 100 pips, then you’re risking $1 to make $2. If you do this consistently, then in the long run, you’ll realize that your winners will be larger than your losses.
The key thing is again, plan your exit and identify favourable risk-reward on your trades. Whenever you put on a trade, identify the potential risk-reward on the trade. ‘
With that said, let me do a quick recap.
- Your trading psychology makeup as a trader can cause you to incur large losses and to have small wins
- Wide stop loss and small profit target will also incur large losses and small winners
- Trading against the trend might be another possibility
- Plan your exit and also identify favourable risk-reward trading setups
With that said, I wish you good luck and good trading. I’ll talk to you soon.