Just wondering if any of you guys have had in the past or still have a problem with loss aversion (struggle to accept a loss) and then try to make it back any any cost.
This problem is one that can destroy your 'career' as a trader before its even bagan and I'm curious to know if there are any traders out there who have succesfully mastered this handicap or if like me you believe that this is a character flaw which cannot be overcome in the world of trading.
Loss Aversion
-
oddstrader
- Posts: 344
- Joined: Fri Apr 16, 2010 4:55 pm
came across this article - maybe it might help you. 
By Robin Dayne
By After 14 years of having the opportunity and privilege to coach different levels of traders in most markets and situations, some very interesting and common problems emerged. Coaching brings the best and the worst out of traders and being honest with who you are as a person becomes an essential part of trading. We are not perfect as people and we certainly are not perfect as traders.
My clients run the gambit, from, what I call “heavy hitters” making $750k to several million per year, to “newbies” who have been actively in the market for 1- 10 years. The range of experience has allowed me to compare what seasoned traders do differently in their trading approach, to what the new trader maybe missing. Always the goal is to pass down information that will speed up the learning curve and increase the odds of “making it”, as so many don’t.
With that said, three common trading problems consistently would foster re-occurring losses. Two turned out to be innate human qualities most don’t think about and if they did. Most likely wouldn’t know how to fix them. Since awareness is the first part of changing anything, bringing these problems to light can prevent them from reeking havoc on a trader’s mindset and profitability.
Those who have chosen this very unique career of “trader” face a mountain of challenges each day based on ever-changing market conditions. Added to the market challenges are emotions, which can be 90% of the game. You can have a great method, strategy and be taught by the best, but if fear, apprehension or hesitation come up the trader won’t take the trade…..this is an emotional block. All successful and experienced traders learn quickly to become the masters of their emotions. To accept and manage their weaknesses and leverage their strengths.
At first most traders start by researching and determining a method to trade. They do little to emotionally prepare for what’s to come. Yet they quickly find out that their emotions come into play early on, especially if they experience immediate losses. Losing money coupled with one’s own emotional “baggage” can impact the minds thought process and outcome.
My work focuses on the power of the mind and in particular the power of thought. These three problems and solutions do too. Nothing happens without the some form of thought, be it sub-conscience or conscience. After all, isn’t this what we’re left with when sitting in front of our monitors trading? What comes into our minds, as we trade can be avalanches of different thoughts. These thoughts then have the ability to assist us and add to our success or become our worst nightmares resulting in multiple losses.
Traders over time, come to the realization that trading will force them to face ALL their old and current emotional baggage and blocks. And that NOT being able to manage or “dump” the baggage, can hit the bottom line quickly.
When a trader’s plan doesn’t work they tend to blame it on the method, when in reality it usually comes down to an emotion causing them to react inappropriately. We can pick up automatic emotional blocks that prevent us from implementing a method effectively. Many try to get over these emotions on their own, but few master the changes needed.
But lets get specific and to the heart of these three trading problems. The first reason traders lose may seem obvious but in reality it stems from long term social conditioning. It’s their inability to ACCEPT LOSS. Losing generates powerful emotions, such as fear, uncertainty, apprehension, and self-doubt especially with men. And while women today can also be as affected, the data is supported mostly by men as they represent a larger portion of the client base.
Men are socially conditioned to succeed from the time they enter the world. From little boys being read, “The Little Train That Could” to the environments that surround them as they grow up. They are guided to be become achievers. Influenced by family, friends, education, and career environments they are encouraged to seek professions of Doctors, Lawyers, and Bankers. Images and social metaphors reinforce them. Striving to be right, number one, the breadwinner, and the best, always seeking perfectionism. They are socially conditioned to be the family providers. Add to this various cultural pressures and demands and men have a built-in fundamental obligation to succeed.
These pressures translate directly to the trading mindset in many forms. One sign is when a trader makes “speedy exits.” This usually stems from some sort of fear, which came from many small losses or one big one. Fear causes the mind to question and react while the trade is still “safe”. Another is increasing size while in a bad position. This thinking is, the “I’ll get it back” faster if I do this. The reality is the trader will typically go down faster. Finally, there is over-trading, or getting hooked, taking one trade, after another after another, usually all losers. This can expose an addictive behavior and the “have to play the game” syndrome. All can be indications of an emotional block and reaction to previous losses.
So why is accepting a loss a bad thing? Losing is a “SHOCK” to the system after all the conditioning to succeed. Trading as a career is usually the first time, the trader is faced with the inescapable reality that everyday and every trade, presents the possibility of losing. Each trade is a balancing act between failure and success and the possibility of being wrong. When a loss occurs, there is a powerful emotional attack on the ego, self-esteem, confidence, and security. This is where the risk of an emotional “block” occurs. These blocks have a tendency to resurface when least expected. The top two emotions expressed by 95% of traders are fear and frustration.
The solution is to take a reality check. LOSING is part of the game. Its possibility never goes away, it never takes a long vacation and if it’s “meaning” is not re-defined it never feels good. Bottom line, traders lose. The key is, how much and how often, separates the great traders from those who will always struggle.
How a trader chooses to overcome and accept this can prove to be critical to their success. Ignoring it can create a disability so severe it can paralyze the mind’s ability to think clearly.
So, what’s the solution and what can a trader do? First is, to NOT fall prey to any emotion and to let go of ego. Knowledge and awareness lead to change. One can learn to accept losing by redefining the meaning of loss. If you define or equate it to failure then it will take its toll on the bottom line but redefining it is a way to move forward, a way to improve trades and make losing OK. Look at losing as a good thing that will improve a trade. Find something new. Make the mistake a “blip” on the radar and let it come and go with ease, no big deal.
Journal each trade. It’s the fastest way to uncover what’s wrong and make the change to success. Many traders hate taking the time, but if staying in the game is the goal than this will work for the long term. Create a new mindset, don’t rush, there is always another great trade around the corner, even if you missed one. Take a break if you are having a challenge to get back on track, and give your mind a rest. Change your focus.
Each loss allows a trader to figure out what has to be changed so the next time this situation arises they now have the new strategy a new technique. Going into avoidance or denial fosters additional losses and bad emotions. This approach is a sure way of trading yourself out of the business. Trading is the ultimate “honesty pill.” The honestly of who you are with weaknesses and strengths.
Bottom line: Make losing OK. Find your solutions with questions that will move the trade in a forward direction. Example: How could I make that trade better? What could I do or see to stay with that trade longer?
The second trading challenge is the innate human characteristic of “patterns.” Patterns are all around us in thousands of forms. In nature as a snowflake, or leaf, right down to the formations within cellular structure.
Our innate propensity for patterns is with us each and every day. We have a built–in need for patterns. WHY? They make us feel secure, stable, certain and solid. We are automatically drawn to patterns whether we know it or not. Think of going to your favorite restaurant, taking the menu, asking for the specials and 95% of the time you’ll order the same thing you did the time before… pattern. Or when you choose what to wear from your closet and you pick your favorite pair of pants, favorite shirt….patterns.
Here’s the problem, while you body is prone to assimilate patterns to feel comfortable, your mind doesn’t have the ability to distinguish and know to only keep the good ones and not hold onto the bad ones. It just thinks “WOOPIE” that feels like a pattern lets hold on to that one, good or bad.
Patterns are how the police find the bad guys, because criminals tend to do the same things over and over. It’s innate, part of who we are, but we are not normally taught how to control this and when we go to trade we’re not aware of how it can affect our trades. The mind will hold onto ANY pattern given the chance.
Here is an example of a trader with a locked in pattern. He calls and says: “I took 7 trades and can’t do anything right.” I say, “So you lost at all 7 trades?” he replies, “No I lost at 5 and won at 2. I ask him what happened with the 5 and can he describe them? He is very specific in what he did wrong and as a matter of fact after he makes about 5 or 6 points he says oh yeah and they are all the same. I then get to say my favorite line: “ That’s great you know exactly what you did wrong and your descriptions are as very accurate, you just saved money on your coaching today, “don’t do that again”. The reply is always the same, “But I can’t stop!” I know now this trader has “locked” in a pattern. They intellectually know they should stop but they can’t and they repeat the same problem over and over and repeat the loss over and over. They never made a change and the body just loves holding on to this. Finally, I then ask what happened to the 2 trades you won? They say: “I can’t remember!”
So the two trades I want them to lock into a pattern they have ignored and the 5 I want them to forget and change they have locked in.
What’s the solution to breaking a pattern? It’s critical to notice when the pattern is happening and to never let it take hold. Attacking a loss immediately helps this. Should a trader not notice the first loss, and the second occurs, than they should really be aware and analyze it. If the second one is not examined and slips by, and the third one occurs, now the risk of the pattern being locked in is very high. I call it the three strikes your out rule. If you have 3 trades exactly alike and they are losers you have to make it a MUST to examine them and change the approach. If you don’t the probability of repeating it and losing again is VERY, VERY high. A trader must do whatever it takes to stop.
Getting up and moving is the fastest way to stop a pattern. Take a walk move around. Next, is to be sure there is no emotion, and to let go of the loss and be inquisitive, to modify the approach and have a new solution for the next trade. If a trader is out of control at this point they maybe hooked and have gone into what I call the “I don’t care zone”. There is this strange thing that happens when a trader losses over and over, they get mesmerized and just let the trade and money slip away watching it and not doing anything till the pain level is so great they finally make a decision and exit. We know what happens next…..the trade turns and goes back in the right direction. It’s important to avoid bad repeat patterns at all cost. Do whatever it takes to break them.
Finally the biggest most dangerous of the three problems is EMOTION. ANY emotion at all while trading, I call “Trader’s Fog”. When a trader experiences emotion at anytime during the trade they can not think clearly, because the emotion is stronger. So they react in the wrong way. Emotions will cloud judgement and prevent a trader from being creative because the mind can not allow normal thought to occur. Emotions over-ride logical thought.
Emotions don’t allow for adjustments, “distinctions” or ways to modify the trade and blocks can get implanted if emotions get out of control. Emotions are a trader’s worst enemy. Here is how you know you have an emotional block. If you want to trade a certain way and react a certain way but can’t and are “pulled” to react differently even though you intellectually KNOW you want to do, you have a block.
Keeping one’s mind on track focused and directed is the ultimate mind-set for successful traders. While this sounds like an easy thing to do it can be the biggest challenge a trader will have to overcome.
I found that men love to express their challenges to one another. I guess it’s part of the male bonding thing, to feel like they are part of the “pack”, one of the boys. When working in the trading room on Wall St. I was amazed when I would hear things like “trading is like a battle today. Or “The markets killing me” Or “I feel like I am hitting my head against the wall everytime I take a trade.” These kind of thoughts are very detrimental to trading as it will pollute a traders overall attitude and how they feel. To be mentally at the top of the game it’s important to remove and changed this type of thinking.
The mind can not tell the difference between what’s real and not real; it only picks up what we tell it. So if we tell it it’s in a battle it thinks its in a battle and it puts us into a ‘flight and fight mode”. This is not the mode or mindset conducive to trading.
Our emotional strengths and “peak’ mind-set come from how we think and what we think about. If you put bad things into the thought process you get bad things out, put good things in and you get good things out.
Finally the best way to remove emotions in the moment is to ask the mind a good question. Questions force the mind to release the emotion, as it shifts to finding the answer to the question. It’s the number one way to shift while sitting there focused on a trade, whether an entry or exit.
It’s important to also remember, should you not be able to control what your doing, most likely there is a strong block taking over. In that case you will need additional help to release it, as they typically get locked into our bodies.
I use the example of a candle. If you never experienced a candle and I said this is going to be a great experience try it…and you do…you put your hand over the candle and you get burned and say “ouch”. I say: “That was strange that never happened before it’s supposed to be a good feeling do it again….you do and say “ouch”. Each time a neuro-connection is formed in the mind, and with each similar experience it gets stronger. When it gets very strong and your mind believes you are about to be hurt it will go into an autopilot mode I call protection or defensive mode. So back to the candle …..I ask you one more time “put your hand over the candle it will be fine” what do you think you will say? NO WAY! Your mind and body is in protection mode, and it will cause fear, apprehension or hesitation to stop you and protect you from harm.
This innate amazing quality we have for self-preservation is great for candles and it stinks for trading. The candle and mind work the same related to trading losses and what we feel about money. A trading loss equals and “ouch” many small losses and it strengthens in our mind. A really big loss and a trader can become frozen and paralyzed.
If a trader is at this stage they most likely need some coaching to get over it. If asking questions doesn’t work the block is usually too strong. There are techniques that can remove blocks quickly and are worth learning if trading is serious for you.
So in closing, make losing your best friend, don’t let bad patterns take hold, and trade emotionless.
And from “The Trader’s Coach” be happy, healthy, have fun and most of all be responsible. You and only you are responsible for your trading.
By Brett N. Steenbarger, Ph.D.
When I sat down to write this article, I thought it would be challenging—but useful—to distill over 20 years of trading experience—and 25 years of specializing in brief therapy—into ten lessons that I have learned while working with traders (including myself!). In that time, I’ve written two books on trading and worked with dozens of professional traders at a proprietary trading firm. What has this taught me? Let’s break it down:
1. Trading affects psychology as much as psychology affects trading – This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.
2. Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.
3. Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as underconfidence during strings of losers.
4. Size kills – The surest path toward emotional damage is to trade size that is too large for one’s portfolio. We experience P/L in relation to our portfolio value. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings.
5. Training is the path to expertise – Think of every performance field out there—sports, music, chess, acting—and you will find that practice builds skills. Trading, in some ways, is harder than other performance fields because there are no college teams or minor leagues for development. From day one, we’re up against the pros. Without training and practice, we will lack the skills to survive such competition.
6. Successful traders possess rich mental maps – All successful trading boils down to pattern recognition and the development of mental maps that help us translate our perceptions of patterns into concrete trading behaviors. Without such mental maps, traders become lost in complexity.
7. Markets change – Patterns of volatility and trending are always shifting, and they change across multiple time frames. Because of this, no single trading method will be successful across the board for a given market. The successful trader not only masters markets, but masters the changes in those markets.
8. Even the best traders have periods of drawdown – As markets change, the best traders go through a process of relearning. The ones who succeed are the ones who save their money during the good times so that they can financially survive the lean periods.
9. The market you’re in counts as much toward performance as your trading method – Some markets are more volatile and trendy than others; some have more distinct patterns than others. Finding the right fit between trader, trading method, and market is key.
10. Execution and trade management count – A surprising degree of long-term trading success comes from getting good prices on entry and exit. The single best predictor of trading failure is when the average P/L of losing trades exceeds the average P/L of winners.
Well, I’ve already hit ten and I have at least ten more I could jot down. Number 11 would be that successful performance mentors have content expertise in their particular domain. What I mean by that is that teachers of concert musicians themselves have experience as musicians; basketball coaches invariably have played the sport themselves. You learn trading by seeing your mentor trade and by having your mentor observe your trading. The right mentorship goes a long way toward shortening learning curves.
Figure it out: what proportion of baseball players, golfers, actresses, chess players, singers, or bicyclists can make a consistent living from their performance activities? Is trading really so much easier than those activities? The stark reality is that expertise in any performance field is the exception, not the rule, requiring dedicated practice and training. If you are emotionally prepared for the learning curve—and excited by the challenge—you are well ahead of the game. Start with finding the Three M’s: right methods, markets, and mentors. Those are the foundation of success, upon which you build skills and experience. Enjoy the journey!
By Robin Dayne
By After 14 years of having the opportunity and privilege to coach different levels of traders in most markets and situations, some very interesting and common problems emerged. Coaching brings the best and the worst out of traders and being honest with who you are as a person becomes an essential part of trading. We are not perfect as people and we certainly are not perfect as traders.
My clients run the gambit, from, what I call “heavy hitters” making $750k to several million per year, to “newbies” who have been actively in the market for 1- 10 years. The range of experience has allowed me to compare what seasoned traders do differently in their trading approach, to what the new trader maybe missing. Always the goal is to pass down information that will speed up the learning curve and increase the odds of “making it”, as so many don’t.
With that said, three common trading problems consistently would foster re-occurring losses. Two turned out to be innate human qualities most don’t think about and if they did. Most likely wouldn’t know how to fix them. Since awareness is the first part of changing anything, bringing these problems to light can prevent them from reeking havoc on a trader’s mindset and profitability.
Those who have chosen this very unique career of “trader” face a mountain of challenges each day based on ever-changing market conditions. Added to the market challenges are emotions, which can be 90% of the game. You can have a great method, strategy and be taught by the best, but if fear, apprehension or hesitation come up the trader won’t take the trade…..this is an emotional block. All successful and experienced traders learn quickly to become the masters of their emotions. To accept and manage their weaknesses and leverage their strengths.
At first most traders start by researching and determining a method to trade. They do little to emotionally prepare for what’s to come. Yet they quickly find out that their emotions come into play early on, especially if they experience immediate losses. Losing money coupled with one’s own emotional “baggage” can impact the minds thought process and outcome.
My work focuses on the power of the mind and in particular the power of thought. These three problems and solutions do too. Nothing happens without the some form of thought, be it sub-conscience or conscience. After all, isn’t this what we’re left with when sitting in front of our monitors trading? What comes into our minds, as we trade can be avalanches of different thoughts. These thoughts then have the ability to assist us and add to our success or become our worst nightmares resulting in multiple losses.
Traders over time, come to the realization that trading will force them to face ALL their old and current emotional baggage and blocks. And that NOT being able to manage or “dump” the baggage, can hit the bottom line quickly.
When a trader’s plan doesn’t work they tend to blame it on the method, when in reality it usually comes down to an emotion causing them to react inappropriately. We can pick up automatic emotional blocks that prevent us from implementing a method effectively. Many try to get over these emotions on their own, but few master the changes needed.
But lets get specific and to the heart of these three trading problems. The first reason traders lose may seem obvious but in reality it stems from long term social conditioning. It’s their inability to ACCEPT LOSS. Losing generates powerful emotions, such as fear, uncertainty, apprehension, and self-doubt especially with men. And while women today can also be as affected, the data is supported mostly by men as they represent a larger portion of the client base.
Men are socially conditioned to succeed from the time they enter the world. From little boys being read, “The Little Train That Could” to the environments that surround them as they grow up. They are guided to be become achievers. Influenced by family, friends, education, and career environments they are encouraged to seek professions of Doctors, Lawyers, and Bankers. Images and social metaphors reinforce them. Striving to be right, number one, the breadwinner, and the best, always seeking perfectionism. They are socially conditioned to be the family providers. Add to this various cultural pressures and demands and men have a built-in fundamental obligation to succeed.
These pressures translate directly to the trading mindset in many forms. One sign is when a trader makes “speedy exits.” This usually stems from some sort of fear, which came from many small losses or one big one. Fear causes the mind to question and react while the trade is still “safe”. Another is increasing size while in a bad position. This thinking is, the “I’ll get it back” faster if I do this. The reality is the trader will typically go down faster. Finally, there is over-trading, or getting hooked, taking one trade, after another after another, usually all losers. This can expose an addictive behavior and the “have to play the game” syndrome. All can be indications of an emotional block and reaction to previous losses.
So why is accepting a loss a bad thing? Losing is a “SHOCK” to the system after all the conditioning to succeed. Trading as a career is usually the first time, the trader is faced with the inescapable reality that everyday and every trade, presents the possibility of losing. Each trade is a balancing act between failure and success and the possibility of being wrong. When a loss occurs, there is a powerful emotional attack on the ego, self-esteem, confidence, and security. This is where the risk of an emotional “block” occurs. These blocks have a tendency to resurface when least expected. The top two emotions expressed by 95% of traders are fear and frustration.
The solution is to take a reality check. LOSING is part of the game. Its possibility never goes away, it never takes a long vacation and if it’s “meaning” is not re-defined it never feels good. Bottom line, traders lose. The key is, how much and how often, separates the great traders from those who will always struggle.
How a trader chooses to overcome and accept this can prove to be critical to their success. Ignoring it can create a disability so severe it can paralyze the mind’s ability to think clearly.
So, what’s the solution and what can a trader do? First is, to NOT fall prey to any emotion and to let go of ego. Knowledge and awareness lead to change. One can learn to accept losing by redefining the meaning of loss. If you define or equate it to failure then it will take its toll on the bottom line but redefining it is a way to move forward, a way to improve trades and make losing OK. Look at losing as a good thing that will improve a trade. Find something new. Make the mistake a “blip” on the radar and let it come and go with ease, no big deal.
Journal each trade. It’s the fastest way to uncover what’s wrong and make the change to success. Many traders hate taking the time, but if staying in the game is the goal than this will work for the long term. Create a new mindset, don’t rush, there is always another great trade around the corner, even if you missed one. Take a break if you are having a challenge to get back on track, and give your mind a rest. Change your focus.
Each loss allows a trader to figure out what has to be changed so the next time this situation arises they now have the new strategy a new technique. Going into avoidance or denial fosters additional losses and bad emotions. This approach is a sure way of trading yourself out of the business. Trading is the ultimate “honesty pill.” The honestly of who you are with weaknesses and strengths.
Bottom line: Make losing OK. Find your solutions with questions that will move the trade in a forward direction. Example: How could I make that trade better? What could I do or see to stay with that trade longer?
The second trading challenge is the innate human characteristic of “patterns.” Patterns are all around us in thousands of forms. In nature as a snowflake, or leaf, right down to the formations within cellular structure.
Our innate propensity for patterns is with us each and every day. We have a built–in need for patterns. WHY? They make us feel secure, stable, certain and solid. We are automatically drawn to patterns whether we know it or not. Think of going to your favorite restaurant, taking the menu, asking for the specials and 95% of the time you’ll order the same thing you did the time before… pattern. Or when you choose what to wear from your closet and you pick your favorite pair of pants, favorite shirt….patterns.
Here’s the problem, while you body is prone to assimilate patterns to feel comfortable, your mind doesn’t have the ability to distinguish and know to only keep the good ones and not hold onto the bad ones. It just thinks “WOOPIE” that feels like a pattern lets hold on to that one, good or bad.
Patterns are how the police find the bad guys, because criminals tend to do the same things over and over. It’s innate, part of who we are, but we are not normally taught how to control this and when we go to trade we’re not aware of how it can affect our trades. The mind will hold onto ANY pattern given the chance.
Here is an example of a trader with a locked in pattern. He calls and says: “I took 7 trades and can’t do anything right.” I say, “So you lost at all 7 trades?” he replies, “No I lost at 5 and won at 2. I ask him what happened with the 5 and can he describe them? He is very specific in what he did wrong and as a matter of fact after he makes about 5 or 6 points he says oh yeah and they are all the same. I then get to say my favorite line: “ That’s great you know exactly what you did wrong and your descriptions are as very accurate, you just saved money on your coaching today, “don’t do that again”. The reply is always the same, “But I can’t stop!” I know now this trader has “locked” in a pattern. They intellectually know they should stop but they can’t and they repeat the same problem over and over and repeat the loss over and over. They never made a change and the body just loves holding on to this. Finally, I then ask what happened to the 2 trades you won? They say: “I can’t remember!”
So the two trades I want them to lock into a pattern they have ignored and the 5 I want them to forget and change they have locked in.
What’s the solution to breaking a pattern? It’s critical to notice when the pattern is happening and to never let it take hold. Attacking a loss immediately helps this. Should a trader not notice the first loss, and the second occurs, than they should really be aware and analyze it. If the second one is not examined and slips by, and the third one occurs, now the risk of the pattern being locked in is very high. I call it the three strikes your out rule. If you have 3 trades exactly alike and they are losers you have to make it a MUST to examine them and change the approach. If you don’t the probability of repeating it and losing again is VERY, VERY high. A trader must do whatever it takes to stop.
Getting up and moving is the fastest way to stop a pattern. Take a walk move around. Next, is to be sure there is no emotion, and to let go of the loss and be inquisitive, to modify the approach and have a new solution for the next trade. If a trader is out of control at this point they maybe hooked and have gone into what I call the “I don’t care zone”. There is this strange thing that happens when a trader losses over and over, they get mesmerized and just let the trade and money slip away watching it and not doing anything till the pain level is so great they finally make a decision and exit. We know what happens next…..the trade turns and goes back in the right direction. It’s important to avoid bad repeat patterns at all cost. Do whatever it takes to break them.
Finally the biggest most dangerous of the three problems is EMOTION. ANY emotion at all while trading, I call “Trader’s Fog”. When a trader experiences emotion at anytime during the trade they can not think clearly, because the emotion is stronger. So they react in the wrong way. Emotions will cloud judgement and prevent a trader from being creative because the mind can not allow normal thought to occur. Emotions over-ride logical thought.
Emotions don’t allow for adjustments, “distinctions” or ways to modify the trade and blocks can get implanted if emotions get out of control. Emotions are a trader’s worst enemy. Here is how you know you have an emotional block. If you want to trade a certain way and react a certain way but can’t and are “pulled” to react differently even though you intellectually KNOW you want to do, you have a block.
Keeping one’s mind on track focused and directed is the ultimate mind-set for successful traders. While this sounds like an easy thing to do it can be the biggest challenge a trader will have to overcome.
I found that men love to express their challenges to one another. I guess it’s part of the male bonding thing, to feel like they are part of the “pack”, one of the boys. When working in the trading room on Wall St. I was amazed when I would hear things like “trading is like a battle today. Or “The markets killing me” Or “I feel like I am hitting my head against the wall everytime I take a trade.” These kind of thoughts are very detrimental to trading as it will pollute a traders overall attitude and how they feel. To be mentally at the top of the game it’s important to remove and changed this type of thinking.
The mind can not tell the difference between what’s real and not real; it only picks up what we tell it. So if we tell it it’s in a battle it thinks its in a battle and it puts us into a ‘flight and fight mode”. This is not the mode or mindset conducive to trading.
Our emotional strengths and “peak’ mind-set come from how we think and what we think about. If you put bad things into the thought process you get bad things out, put good things in and you get good things out.
Finally the best way to remove emotions in the moment is to ask the mind a good question. Questions force the mind to release the emotion, as it shifts to finding the answer to the question. It’s the number one way to shift while sitting there focused on a trade, whether an entry or exit.
It’s important to also remember, should you not be able to control what your doing, most likely there is a strong block taking over. In that case you will need additional help to release it, as they typically get locked into our bodies.
I use the example of a candle. If you never experienced a candle and I said this is going to be a great experience try it…and you do…you put your hand over the candle and you get burned and say “ouch”. I say: “That was strange that never happened before it’s supposed to be a good feeling do it again….you do and say “ouch”. Each time a neuro-connection is formed in the mind, and with each similar experience it gets stronger. When it gets very strong and your mind believes you are about to be hurt it will go into an autopilot mode I call protection or defensive mode. So back to the candle …..I ask you one more time “put your hand over the candle it will be fine” what do you think you will say? NO WAY! Your mind and body is in protection mode, and it will cause fear, apprehension or hesitation to stop you and protect you from harm.
This innate amazing quality we have for self-preservation is great for candles and it stinks for trading. The candle and mind work the same related to trading losses and what we feel about money. A trading loss equals and “ouch” many small losses and it strengthens in our mind. A really big loss and a trader can become frozen and paralyzed.
If a trader is at this stage they most likely need some coaching to get over it. If asking questions doesn’t work the block is usually too strong. There are techniques that can remove blocks quickly and are worth learning if trading is serious for you.
So in closing, make losing your best friend, don’t let bad patterns take hold, and trade emotionless.
And from “The Trader’s Coach” be happy, healthy, have fun and most of all be responsible. You and only you are responsible for your trading.
By Brett N. Steenbarger, Ph.D.
When I sat down to write this article, I thought it would be challenging—but useful—to distill over 20 years of trading experience—and 25 years of specializing in brief therapy—into ten lessons that I have learned while working with traders (including myself!). In that time, I’ve written two books on trading and worked with dozens of professional traders at a proprietary trading firm. What has this taught me? Let’s break it down:
1. Trading affects psychology as much as psychology affects trading – This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.
2. Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.
3. Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as underconfidence during strings of losers.
4. Size kills – The surest path toward emotional damage is to trade size that is too large for one’s portfolio. We experience P/L in relation to our portfolio value. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings.
5. Training is the path to expertise – Think of every performance field out there—sports, music, chess, acting—and you will find that practice builds skills. Trading, in some ways, is harder than other performance fields because there are no college teams or minor leagues for development. From day one, we’re up against the pros. Without training and practice, we will lack the skills to survive such competition.
6. Successful traders possess rich mental maps – All successful trading boils down to pattern recognition and the development of mental maps that help us translate our perceptions of patterns into concrete trading behaviors. Without such mental maps, traders become lost in complexity.
7. Markets change – Patterns of volatility and trending are always shifting, and they change across multiple time frames. Because of this, no single trading method will be successful across the board for a given market. The successful trader not only masters markets, but masters the changes in those markets.
8. Even the best traders have periods of drawdown – As markets change, the best traders go through a process of relearning. The ones who succeed are the ones who save their money during the good times so that they can financially survive the lean periods.
9. The market you’re in counts as much toward performance as your trading method – Some markets are more volatile and trendy than others; some have more distinct patterns than others. Finding the right fit between trader, trading method, and market is key.
10. Execution and trade management count – A surprising degree of long-term trading success comes from getting good prices on entry and exit. The single best predictor of trading failure is when the average P/L of losing trades exceeds the average P/L of winners.
Well, I’ve already hit ten and I have at least ten more I could jot down. Number 11 would be that successful performance mentors have content expertise in their particular domain. What I mean by that is that teachers of concert musicians themselves have experience as musicians; basketball coaches invariably have played the sport themselves. You learn trading by seeing your mentor trade and by having your mentor observe your trading. The right mentorship goes a long way toward shortening learning curves.
Figure it out: what proportion of baseball players, golfers, actresses, chess players, singers, or bicyclists can make a consistent living from their performance activities? Is trading really so much easier than those activities? The stark reality is that expertise in any performance field is the exception, not the rule, requiring dedicated practice and training. If you are emotionally prepared for the learning curve—and excited by the challenge—you are well ahead of the game. Start with finding the Three M’s: right methods, markets, and mentors. Those are the foundation of success, upon which you build skills and experience. Enjoy the journey!
Many thanks Oddstrader,
A brilliant article and so many valid points and examples that I can definitely relate to. I've just checked out the authors name on amazon and he has a few books on trading psychology so I might invest in one!
I've been trading for about 6 months and have reached the stage where I can read the markets well enough to make an average profit each day but once or twice during the day I'll make a stupid decision and realise I'm doing it but cant stop myself. On more than one occasion its led to my daily profits been wiped out so as is mentioned in the article it seems to be a mental block of some kind as opposed to some kind of impulse control problem I thought I might have had.
Thanks again
Pat
A brilliant article and so many valid points and examples that I can definitely relate to. I've just checked out the authors name on amazon and he has a few books on trading psychology so I might invest in one!
I've been trading for about 6 months and have reached the stage where I can read the markets well enough to make an average profit each day but once or twice during the day I'll make a stupid decision and realise I'm doing it but cant stop myself. On more than one occasion its led to my daily profits been wiped out so as is mentioned in the article it seems to be a mental block of some kind as opposed to some kind of impulse control problem I thought I might have had.
Thanks again
Pat
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mister man
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best post ive read on here, ......ever...