Before getting into the topic at hand, I want to first say that as a discretionary trader in the ES, I try my best to not think or act like the ‘typical trader’. The typical ES trader is not profitable.
A frequent mistake of the typical trader is to focus on making money. If a trader is not profitable, the primary focus must be to first stop the bleeding. If one is mostly a breakeven trader, the issues may be a bit different.
I know we all come to trading with ideas of making money, and of course, that is the goal, but along the trading journey too many traders get caught up in the wrong type of thinking. I receive numerous emails from traders who tell me about their struggles, and one of the most common themes is the trader who has a good run and then gives it all back, or more, very quickly. While I don’t know the details of each trader’s circumstances, I can infer that a common characteristic may be difficulty accepting a loss, while it is still a small loss, especially after a good run. It’s very easy to become stubborn, or overly rigid in expectations when our confidence swells up along with our account. The market has a way of teaching a lesson to those who think they have progressed to the next level, or reached a new permanent plateau after a windfall or good run. As the account swells, so does the ego; or the dream of easy money takes hold. And for those who are able to manage ego and keep it in check, complacency may be the danger.
Along my own trading journey, as well as watching others, it became abundantly clear to me that one must “learn” how to lose before they can win over time. Lots of traders don’t want to hear that, its not part of the ‘dream’. I once shared this idea with a trading chat room that I’m active in, and several people either objected to it, or said they didn’t understand it at all. And I could tell that some people were actually upset that I even brought it up. The most vocal critics of my comment were generally the struggling traders (not all struggling traders objected, some understand it and are still trying to find their way). Too me, this is further proof that trading requires a mind-set or way of thinking that most are unwilling to consider.
Good point that I’d love to see more discussion from you. I hate losses because to me it means I was wrong. I liked your talk that said you must act in your own best interest. Intellectually, I know that accepting a small loss is in my own best interest. But it is still hard to overcome. I have found one method that has helped.
My trading improved when I switched to “grade” goals based on process instead of “money” goals based on PnL. For example, I grade each trade on a maximum 4 point system (simplified from a 20 point system originally) then translate the points to grades A to F. My “reward” for making only A or B trades can be to make more A or B trades in X time period or to increase position size if consistent over some X time period.
@JCaldwell
That’s an interesting system you’re using. Anything that can keep you out of trouble is a good thing.
Accepting loss is one of the biggest hurdles to overcome as a trader. My blog post wasn’t intended to comprehensively address this issue per se. I was actually responding to many emails I have received recently from traders who have made money and then gave it all back very quickly.
One of the things I talked about in my recent webinar was the importance of mentally rehearsing handling both positive and negative trading scenarios. Mentally practicing/seeing yourself take a loss and handling it well can be helpful, but may not be enough. Ultimately, we have to learn to increase our ability to tolerate discomfort and disappointment. Generally, from a psychological standpoint, we tend to seek pleasure and do whatever we can to avoid discomfort or pain. What makes trading so difficult for so many is the attempt to avoid the discomfort of taking a loss…..but what many people don’t realize is that often we can tolerate pain easier than we think, but for a variety of reasons specific to a given individual, many traders will continue to struggle with it.
Andrew Menaker
It seems that learning to take a loss involves not only acting in your own best interest by taking the loss while it’s still small, but also shaking it off so it doesn’t make you start revenge trading or make you too afraid to take the next setup. And in fact I think the refusal to take a loss may sometimes (often?) have just as much to do with avoiding the negative feelings that persist afterward as with not wanting to be wrong. I’d be very interested to hear you address the issue of getting yourself out of a bad state and regaining your equilibrium.
@MikeS
Unfortunately, I was limited by time and did not go into much detail during the webinar. To me, learning to act in your own best interest includes dealing with the emotional aftermath of a loss. There are various ways to address it. One strategy that I mentioned above (reply to JCaldwell) is to practice your response to negative scenarios using visualization or mental rehearsal. We may never be able to entirely avoid the negative feelings associated with a loss, but we can learn, with practice, to not act out on those negative feelings, e.g. revenge trade due to anger being being stopped out.
Another aspect of dealing with this issue is simply the ability to recognize within yourself the presence of an emotion or a feeling that could cause you to not act in your best interest and then dong something to de-couple the emotion from the typical behavior that follows. It could be as simple as getting away from the computer for a few minutes while you do something physical like some breathing exercises or some stretching. Obviously this assumes that one can recognize and understand their internal state and be wiling to do something about it. In the webinar I mentioned biofeedback but didn’t go into much detail; it can be very effective to help one get centered after an emotionally charged situation.
Andrew Menaker, PhD
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