How To Stop Losing Money Trading (A Trading Grade Sheet To Use)

Let's face it, we all make trading mistakes. Some more costly than others.  But how can we really stop losing money trading ?

Well, let's be clear. As part of any trading strategy, you will encounter losses. It's part of any sound trading strategy to manage your risk appropriately.  But what these article address is what to do to stop bleeding money outside your strategy.

By this I mean if you are constantly breaking rules or don't have a trading strategy at all, then everything you do is wrong.  This template can be helpful to follow to aid in fixing and areas you may be leaking money.

You'd be surprised how simple reviewing of your trading can really have massive effects on your overall performance. The gap between losing and winning might not be as extreme as you think once you assess your own trades in detail.

So, let's get started.

 

Why traders lose money and what to do about it

I touched on this above but I'll dig into this a bit more. Traders lose money for a variety of reasons but the number 1 is a lack of discipline to follow their trading rules.

This is a very costly mistake as most of us have learned over the years.  We suffer from trading psychological issues like  fear of missing out, trading too big and gambling away profits.  You can learn more in this trading psychology post I did.

So what can we do about it ? 

I've compiled a simple template to follow. Essentially, you write down all the aspects of a given trade entry exit etc. and try to weed out any errors you may be making.

This is separate to a trading journal as this is a more day to day type analysis. You can grade yourself and if you are performing poorly, it might be wise to take a step back from trading that day/week.

This template covers the following areas:

  1. Risk/ Reward
  2. Entry Mistakes
  3. Trade Management Mistakes
  4. Exit Mistakes
  5. Position Sizing Errors
  6. Rule breach (not taking a trade that meets your strategy criteria)

You can download the template below and print them off to use everyday.

Risk/Reward

 

risk management

Simply ask yourself, did the trade I entered meet my risk/reward rules. By this I mean, If you have a win % lower than 50%, then you need more than 1 to 1 risk/reward to break even.

If you do not realize this quickly, then our good old friend math will come knocking and eventually bring us right back to reality. Certainly an unwelcome reality check.

Always know your trading statistics. If you don't eventually you will go broke and the goal is to make money !

Obviously, it takes time to build up statistics on your own trading and this is where back testing and demo trading can come into play in helping get the ball rolling.

It is amazing how many traders trade in error against their own stats. They think this one time I'll risk more or whatever. Overtime this one error can really add up. Honestly, it can be a real eye opener how the mind can trick us into believing it's not that significant.

 

Entry Mistakes

The next thing to watch out for is entry mistakes.  What do I mean by this ? Well say your strategy says  for example ' I will entry stock X at price 22' and instead you enter it at 21.80 because you want to buy it cheaper.

Then the breakout at 22 never happens and you stop out losing money.

This is a mistake you made with your entry, more commonly in this example known as FOMO.  It gets us all sometimes and it's annoying. Mark on the template the number of times you do this for every trade and work on decreasing that number.

If you are a day trader, even 1 or 2 cents in trading entry error can be the difference between profitable and losing trader. With swing trading, it may be more flexible but this depends on your strategy really.

We go into this level of detail because the smallest of things can have the biggest difference.  Don't worry if you are overwhelmed at the start. It takes time to get good at anything.

 

Trade Management Mistakes

The next part to monitor is trade management errors. Say you enter a trade with the plan on moving your stop loss to break even when you are up 1 times risk. Instead, you move it up too quickly and stop out only got the trade to continue and work in the direction you had planned.

This is a crystal clear example of a trade management mistake in action. It can also be detrimental to your overall performance if you regularly make these errors.

Recognizing you make these errors is the first part of the puzzle. Then, we can work on some sort of solution so it won't happen again. When we enter into a trade, emotions can come into play and our plan goes out the window, we start moving our targets, pushing our stop losses around.

Ask yourself, how do you think a successful trader would act when they enter a trade ? 

If you are honest, it is definitely not like this. Out of control, emotional!

Stick with your trade management plan before you enter the trade and once in, glue your hands to the table if you have to not interfer. Okay, maybe not that extreme but you get the idea.

 

Exit Mistakes

This is the mistakes you make on exit. An example would be you move your profit targets further away than you originally planned. As a result, you never hit the target and end up taking only a small gain.

This can be very frustrating. When you make a mistake, don't suffer from winning bias.

What this means is say you make an error and are rewarded for it, you might not put that into the template because you made money on it. This is not a good idea because we want to see over time how we are doing by not sticking to our rules.

 

Position Sizing Errors

This can be a nightmare. We get upset because we don't make enough money on a trade so the next one we trade larger size than normal.  Be very careful with this one. It can have catastrophic effects on your results. Just read my trading story.

When I was starting out, I got a little reckless and lost a massive amount because of this error.

Position sizing is so so important. Look at this tweet from a great trader which sums it up superbly.

Trader Stewie

Keep a very close eye on this. Don't make the mistakes I made and get complacent putting too much size on far too soon.  It will come back and bite you. It's a far cheaper lesson to learn this here reading it than making the mistake on your own.

Why would anyone risk 5 or 10% on a trade, that is absolute madness.  Yet so many of us will learn this the hard way and take a big hit. I repeat this so much because it really is something that can cause us the most damage.

Not only financially but emotionally. 

Could you come back from a massive loss after years of hard work ? It takes a strong willed person to do it and many of the great have.

 

Rules breach

This is pretty much self explanatory. Any trade you take outside the scope of your trading rules is a rules breach and should be written down as such. If you don't have a trading strategy yet, this post might be of assistance in getting you on your feet.

For the rest of us with a trading strategy, it is so important to be disciplined. It's easier to remain disciplined when you are making money but when the inevitable drawdown comes, that's when the discipline starts to slip.

It also is the most important time to be disciplined because protection should be your number one priority.

 

An Example Template

losing money trading

 

Here you can see an example filled out template. You can print these off and fill them out yourself.  Essentially, the mistakes are on the left. The amount is the number of times you made a specific mistake in a day/week/month ( whichever you prefer to account for)

Then the grade section is the grade you give yourself on the performance overall.

You can easily see where you are making the most of your mistakes with this template. Look at the example above, clearly the big issue is rules breaches where they were broken 22 times, position sizing and entry mistakes, both making 11 and 5 mistakes respectively.

Graded F obviously means working on these problems first.

So if you do this properly, you can quickly see where you need to work on first be it entry, rules breach etc.

 

 

Conclusion

In summary, trading is a tough job but also a very rewarding one if done right. This template above will help find mistakes you are making and weed them out. Overtime, this will transform your results and make you a far more disciplined and efficient rule following machine.

Don't be disheartened. Each of us have had to start somewhere on our trading journey and the first part of getting better is admitting you have a problem. The template can easily help us find mistakes we are making and get to killing them in a timely manner.

I always say that sometimes, the most simple of things can be the difference from a losing trading to a winning trader and being honest with yourself in answering the template everyday can help identify basic issues and fix them.

Hopefully, all of you have a profitable trading experience and if you are not there yet, don't worry ! It took many successful traders many years to get to where they are now so if you really want it, don't give up.

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