It is often the case that a losing trade can stimulate such negative and destructive emotions that it can derail even the best of strategies.
I remember all too well my earlier experiences as a trader where I reacted so harmfully to the outcomes of trades. Extreme joy from a profitable trade, followed by extreme misery after a losing trade. It was so bad (even though I was oblivious to it) that I was once accused of being on drugs because my mood swings were so drastic! It was after this comment that I set out to rectify this issue and overcoming it was simpler than I anticipated as I implemented a rather strange technique however this took some getting used to. Read on to find out exactly what this technique is. [subscribelocker]
Those of you who know me will be aware that I am an eternal optimist and always see the glass half full. However it was this positive approach to a trading outcome that was causing my emotional swings from one extreme to another and it wasn’t healthy for my P&L or my health so I had to address it. So I did some reading about the pyschology of trading and came across a tip which even though would mean going against my normal instincts, it strangely made sense. The tip was as follows:
‘At the point of taking the trade, expect and accept that it will result in a loss’ – was the advice. I can’t for the life of me remember where I read this, all I knew is that it immediately made sense in my mind as it would help me to manage my own expectations. To illustrate, take every possible outcome of a trade:
1. Trade finishes in a loss
2. Trade finishes at break even
3. Trade finishes in a profit
My initial thought process, and this is matched by almost 99% of those new traders I mentor, is to always expect the best. Even though we are warned about the risks of trading, and that losses are an inevitable part of profiting long term, we still have a natural inclination to expect the best outcome. So let’s think now about our responses to each trade:
1. Trade finishes in a loss – We feel gutted, depressed, miserable, let down, despondent…the list goes on. I am feeling very apprehensive about taking another trade as I don’t like this feeling.
2. Trade finishes at break even – We feel slightly less gutted, depressed, miserable, let down, despondent than above. I am feeling very apprehensive about taking another trade as I don’t like this feeling.
3. Trade finishes in a profit – We feel good, but just good because we expected and wanted it to do well anyhow.
So as you can see, not much is gained by expecting the very best on every trade, even though it is no doubt your instinctive reaction to think like this. It is how we are taught to approach life, business, sport and in the standard context this approach works tremendously well…however overlapping it into trading can in fact become detrimental and why trading continues to be such an emotional battle and those that generally succeed long term, are masters of their emotions (see New Market Wizards book).
Now let’s use the technique of expecting and accepting a loss before it happens and see the marked difference:
1. Trade finishes in a loss – We accepted this outcome before we took the trade. Yes, we don’t feel great, but not half as bad as with the scenario above.
2. Trade finishes at break even – We feel positive to this outcome as it is BETTER than we had anticipated. Fantastic. Let’s go look for that next trade. I have preserved capital and I am ready to go again.
3. Trade finishes in a profit – Brilliant, I have taken profit on this trade when I expected it to result in a loss. I feel fantastic and I am ready to go and identify that next high probability trade.
Even though we have to take an initial negative view, the long term outcome is a neutral or positive reaction to any trading outcome and this will have a positive flow through to future trades. We all know, in order to perform over the long term, we have to trade through some challenging times. If we stop after a tough period in the market, because we ‘feel’ so bad we are never going to hit that next profitable period which will see us through to long term gain.
So if bad reactions to trades is something you suffer from don’t fret. It is a normal human instinct. But you can improve the situation by implementing this very weird but effective technique which I still use and teach to my students to this very day. I can’t say it will work for everyone but at least try it to see if it works for you.