Foreign exchange or FX is a trading mechanism that involves buying and selling and predicting the values of foreign currencies to make a profit. Several factors like the global economy, geopolitics, natural occurrences, and the strategies traders use impact significantly on the profit they make with forex trading. Although platforms like Metatrader provide enough education and opportunity for experience, even the most skilled traders might find themselves losing money on the trade. This situation was significantly seen during the advent of the pandemic in 2020, major geopolitical events like the Ukraine war and other natural disasters.
Psychologists have extensively researched the defences that people use to cope with unpleasant situations detrimental to their reality and survival. Something that every trader would like to undo or reverse is a disastrous investment that incurred monetary losses. Loss of a large amount of money or multiple losses can have a traumatic effect on people. Some might feel that there is no coming back from the situation.
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Why Is Healthy Coping Essential with Trading?
People naturally hope to avoid losses. And when they do occur, they could cause stress and impact the trader’s decision-making ability. Gains and losses are a part of the forex trading market. Although traders cannot take back or undo their investment that cost the loss, they can be mentally prepared to process it. With no preparation or understanding of healthy coping mechanisms, one could make riskier investments or take other drastic measures, making the situation worse. Research shows that dealing with such losses in positive ways can help traders pick themselves back up and recover their lost assets in the market.
Dysfunctional Ways of Coping with Financial Losses
Many people have an automatic dysfunctional coping mechanism while dealing with losses. Here are the most common ones.
Delusion and Denial
Many novice traders who might have had a streak of gains in the market might cling to failed investments in currencies that do not objectively show gains. They have hope that they will go up again. Traders must understand that if they invested in a dud or a depleting currency pair, it is beneficial to reallocate the investment into a safer asset. In short, they must cut their losses, accept the situation and move on.
It is not uncommon among traders to blame their losses on other people, establishments and situations, especially with forex trading with several extraneous factors impacting the values. They might not be ready to take responsibility for their excessive risk-taking, poor strategies or decisions that might have had a role in their losses. Projection does not help one learn from their mistake.
Some also suppress their negative emotions and thoughts that result in financial, family and career-related issues.
Ways to Efficiently Cope with Trading Losses
Traders often experience losses when they let their emotions of overconfidence, greed, fear and herding behaviour take over them. One of the most basic ways to cope with financial losses in trade is to learn from the errors and recoup the loss by making sound investments in the future. There are no quick ways to recuperate, but there are steps one can take to ensure that it does not happen again. Having an objective strategy that is unbiased can revise the mistake over time. They must re-evaluate the risks they took and the people they trusted and rationally dissect the situation before making further decisions. Doing so will help them avoid making poor investments or being victims of fraud and false promises. It is also best to diversify their portfolio to balance their assent allocations by consulting a financial advisor and avoiding significant losses.