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Anyone who trades for long enough will probably encounter big wins from time to time. It's important to know how to handle these wins in a way that won't negatively affect your trading strategy and future trades.
Trading is all about probabilities and a trader could experience a series of trades that don’t go according to plan, potentially making substantial losses, or a run of trades that are all wins, and some of these could be surprisingly substantial. Profits could be boosted by unexpected news or events. For example, a trader could have just bought a share and soon after the company is unexpectedly but fortunately on the receiving end of a takeover approach. Or they could be holding a short currency position when some unexpectedly bad news comes out about that country’s economy, and the currency plunges.
So why are big wins – or a series of wins – potentially a problem? Well, unsurprisingly, it's all to do with psychology. So much of the success or failure of trading stems from what goes on in traders' heads, not on their computer screens, and it is how these big wins affect their thinking that can cause real problems for future trades.
First of all, a large winning trade may make a trader feel invincible – like they have finally cracked 'this trading business' and can rightfully claim their place as a master of the universe. This is a dangerous mindset to have. It is of course important to have a positive outlook and to have faith in their ability to analyse the markets and make good trading decisions. But a feeling that they can do no wrong may well lead to a more relaxed approach to choosing the next trading opportunities and placing trades that they normally wouldn't.
The other danger after a big win – or series of wins – is the temptation to drastically increase trade sizes. This is again linked to overconfidence and a possible feeling that the trader has solved the puzzle of the markets. Trading a lot bigger than they have done previously can lead to traders giving back the large profits they've made, and more.
So what’s the right approach to dealing with unexpected windfalls when trading? First of all, it’s important to recognise that it’s part of the process. Most traders will probably experience big wins from time to time, or trades that deliver profits much quicker than expected. These are always welcome but probably don’t mean they have some clairvoyant ability to be right all the time. Be grateful for the profits, but at this time it's more important than ever to stick to a trading plan and look for the right criteria when placing a trade. Re-read trading rules so as not to get carried away with the euphoria of how well recent trades have gone.
It's tempting to think about increasing trade sizes and there is nothing wrong with that. As a trader's account grows they will want to take on bigger trades, but they should make sure they do so in line with what is hopefully a conservative approach to risk management, rather than assuming the big wins are going to continue. Most professional traders only risk a small portion of their account on any one trading idea, so if increasing trade sizes, be sure to stick to the risk parameters in your trading plan.
Big wins really shouldn’t be a problem, as long as we don't get carried away in the moment. We should remember that occasional losses are inevitable for all traders – the key is to limit the size of those losses with careful risk management while maximising profitable trades.