Managing Reactions to Losing Trades

[RichardCox 10]

It can be argued that the most difficult aspect of trading for those new to the game comes not when a trade itself loses money but when another trading opportunity presents itself and the next trading decision actually needs to be made. It can be a large task to forget the previous trade, collect your thoughts and make the next decision in an informed, rational manner. But the ability to do this is one of the main characteristics that separates professional traders from amateurs.

 

Structuring sound trades after experiencing a loss (or multiple losses) comes mostly as a result of managing reactions and looking at the bigger picture. All traders experience unfavorable trades - anyone suggesting otherwise is either lying or has never actually made a trade with real money. While it is possible for both a professional and amateur trader to have a similar outlook on the market, there is nothing to suggest that both of these traders will end with similar results. Here, we will look at some of the reasons why this is the case.

 

Evaluating System Efficacy Rather than Focusing on Individual Trades

 

One of the key differences between the successful trade reaction management of professionals and those of amateurs can be seen when the successful trader focuses on the rationale behind the trading system rather than on the outcome of one specific trade. Of course, a single trade cannot make a trading career. Successful trading careers require a large number of individual trades in combination, so the outcome of any one instance is not going to be of large importance. So, when we place a larger number of trades, an individual losing trade will start to look much more insignificant.

 

When new traders approach the forex markets in this way, singular losing trades will be much easier to manage and much less distracting when you are going to place your next trade. This will also make it easier to exit trades once your accepted levels of risk are reached. In lieu of this, new traders tend to become married to losing trades (based on emotional and irrational reactions) and are unwilling to accept losses.

 

Trades are left open too long as the trader attempts to convince himself that the market will turn later, even in the face of constant rejection. These problems come directly from the idea that each individual trade is much more important than it actually is. Now, this is not to say that each trade has zero importance, but in all cases we much have some context in mind and take into account the broader picture: The next trade is simply part of a much larger whole, and even if the original idea is not successful, there will be many more opportunities to make up (and overcome) the loss.

 

Approaching the Market with a Professional Mindset

 

When looking to approach the forex market with a professional mindset both front end practices ( those taken before the trade is placed) and back end practices ( those taken after the trade is placed) must be calm, mechanical and rational in nature. Of course, as human beings, it is impossible to completely remove emotions from the equation but attention must be centered in this area and it pays to realize that accepting risk is a standard part of trading and you must be ready to exit a trade when the market if telling you the original idea was incorrect.

 

A professional trader is able to accept losses in a much calmer way because they are fully aware of the strengths of their strategies and how these strengths fit into their overall money management scheme. When we don’t allow our trading egos to get in the way, it is much easier to prevent a 2% loss that turns into a 5% or 10% loss if the market continues to move in the wrong direction. Larger losses like these are unacceptable for professional traders, so it pays to watch the signals and to pay attention to what the market is telling you.

 

Maintaining the Sustainability of Your Trading Career

 

When following these rules and in paying attention to this frame of mind, it becomes much easier to sustain the longevity of your trading career. If “being right” is what is most important to you (and you try to force a losing trade into profitability), it is highly unlikely that you will be able to remain active in the forex markets for very long.

 

Instead you must do the research to develop a trading system, and to actively obey the rules of that system. This allows traders to maintain an edge in the longer term by avoiding the old adage of “putting all of your eggs into one basket.” This is what occurs when we allow one trade to ruin a trading day (or week, or month) because we are failing to take the much larger picture into account.

 

This is a key difference between professional traders and amateur traders. A newer trader is only focused in the things that are directly in front of him (the open trade seen currently). Alternatively, the professional trader gives most of his attention to the trading system at work. Luckily, these trading systems do not need to be overly complicated in order to be profitable. Indeed, there are many trading systems that are very simple and are still able to profit consistently over time.

 

Conclusion

 

So, when we avoid trying to “force” our trades to work in our favor (which, it should be clear, is impossible), and maintain a strict usage of favorable risk to reward ratios, it becomes much easier to relax when individual trades start to move in the wrong direction. To be sure, the level of calm that is experienced by professional traders might seem overly mysterious. It might seem as though these traders do not actually worry about losing money. But this is far from the reality. Instead, these traders understand that losses are a regular part of trading and that sound money management and a consistent strategy will erase (and overcome) these temporary difficulties once the bigger picture is taken into account.

[steve46 12]

None of this has anything to do with a specific market..is there a reason the author refers to "forex" every few sentences.....?

 

Professionals come in all shapes & sizes...all you need initially is money....in my opinion, the ultimate "screening mechanism" for skilled pros are A) time in the game B) general approach to the business (also called attitude) and C) results....

 

Over the years, I have noticed that highly skilled participants rarely respond emotionally to wins OR losses....while less skilled folks respond emotionally to both....I think what happens is that over time some folks figure out that indulging in an emotional response to either result takes your focus away from the job at hand....leading to additional losses (if you happen to be losing) and/or to missed opportunities (because you are too busy being pissed off to recognize the next trade as it sets up)....I think its about that simple...

 

I leave it to the reader to decide on what level they wish to participate...

 

Best Regards

Steve

Edited November 19, 2012 by steve46

[SIUYA 11]

  steve46 said:

Professionals come in all shapes & sizes...all you need initially is money....

 

 

can you go from being a professional with money to an amateur because you have no skills?

[steve46 12]

  SIUYA said:

can you go from being a professional with money to an amateur because you have no skills?

 

I think its not uncommon for people to "think of themselves" as professionals because they have money (for the moment)....I am suggesting that eventually the market decides who is and who isn't a professional.....lets put it this way, if you're a net loser over an extended period of time, one has to wonder if you have the requisite risk management skills to really belong in this industry. Clearly we all start out as amateurs....the real question is where do we end up?

[wrbtrader 10]

There's a difference between professional traders versus retail traders.

 

Professional traders work for a company or for someone...they do not trade their own capital. They trade from an office with other traders, usually are salary ($100k - 1 million on average depending upon the company), pay vacation, and health & dental benefits, performance bonuses and retirement plans. In addition, professional traders usually have a "compliance officer or office" that helps ensure they follow whatever trading rules/risk management rules have been designated by the boss or board.

 

In contrast...

 

Retail traders trade their own capital and usually trade from home. Yet, there are some retail traders (very few) that do get an office and there are some retail traders that trade capital given to them by family or friends. Yet, the latter must not exceed a certain limit that would then require certification and so on. In that case, they then become professional traders when they begin trading a large sum of capital that's been given to the trader to "manage".

 

Therefore, professional traders are LESS likely to get emotionally attach to trades in comparison to retail traders via the above obvious reasons.

[MightyMouse 12]

  wrbtrader said:

There's a difference between professional traders versus retail traders.

 

Professional traders work for a company or for someone...they do not trade their own capital. They trade from an office with other traders, usually are salary ($100k - 1 million on average depending upon the company), pay vacation, and health & dental benefits, performance bonuses and retirement plans. In addition, professional traders usually have a "compliance officer or office" that helps ensure they follow whatever trading rules/risk management rules have been designated by the boss or board.

 

In contrast...

 

Retail traders trade their own capital and usually trade from home. Yet, there are some retail traders (very few) that do get an office and there are some retail traders that trade capital given to them by family or friends. Yet, the latter must not exceed a certain limit that would then require certification and so on. In that case, they then become professional traders when they begin trading a large sum of capital that's been given to the trader to "manage".

 

Therefore, professional traders are LESS likely to get emotionally attach to trades in comparison to retail traders via the above obvious reasons.

 

You would think that such a distance would allow professional investors to be less emotional., but anyone with low self esteem will get attached to a trade or to trading results. "American Greed" aired on CNBC every night is chock full of money managers who needed to create ponzi schemes to maintain their ability to attract money to their funds.

[steve46 12]

This is (for me) an opportunity to put a context to the phrase "self esteem"...

 

I realize that its fashionable to think of self esteem in terms of "high" & "low"....but I find it useful to think in terms of developmental stages....

 

For me, self esteem is the way in which a person relates to the world "at large".

 

I think of self esteem in terms of "adult", "adolescent", "childlike" and "infantile"

 

Not interested in putting on a seminar, but for my purposes (mostly teaching) I look for folks who demonstrate "adult self-esteem"....meaning that they look at the world in a realistic way,

AND they have few illusions about their relative position in the world...ultimately they use that realistic viewpoint to make decisions, to achieve the goals they choose and to live their lives.

 

On the other end of the spectrum...folks with "infantile" self esteem often show up in places like this asking others to provide solutions to their "problems".....to provide answers to every question, and if possible to provide services at no cost...why....well because thats what they want.....usually an infantile character has been "created" by parental influence, typically a doting, over involved mother figure....

 

In a society like ours, these polar opposites exist in abundance (along with adolescent and childlike personalities) and the relation of age to "type" is simple....an adult is expected to have adult self esteem....an infant is expected to have infantile self esteem (how could it be otherwise)....and the same with adolescents and children of various ages....for each...their self esteem (their world view) should be appropriate to their age....when it is NOT...for example when a 30 year old person displays infantile self esteem, THEN you have potential problems....

 

Since these character types have nothing to do with intelligence, each of these types of personalities can be smart, engaging, even charming when pursuing their goals...and for every one except the adult...the ultimate goal is to "be taken care of"....in contrast, the "adult" looks to acheive goals that allow them to "take care of" themselves.....

 

I bring this up because for traders who have what MM calls "low" self esteem, it seems to me that the hidden goal is to have the trade "take care of" them....that is to say, if the trade is successful, it provides validation (they are smart, rich, right, etc)....and when it doesn't, they are...well....it provides the tension that they experienced as infants or young children who want something but aren't quite sure that "it" is forthcomming....very similar to what some therapists call "repetition compulsion". Either way the process fills a need

 

For the adult, they don't need to be right....rich, smart, etc....they tend to focus on learning the skills and monitoring their progress realistically....for the other groups it becomes a matter of repetition of an underlying conflict and unfortunately they are likely to continue to focus on THAT instead of making good choices and learning how to make a living...

 

Good luck in the markets folks

Steve

Edited November 21, 2012 by steve46