Jeremy Chunn from the Australian Financial Review interviewed me for his Trading Psychology column in the AFR Smart Investor Magazine. We discussed  why traders first need to learn to lose in order to win.  You can read the article here:

 http://www.afrsmartinvestor.com.au/p/market-intelligence/why_you_need_to_learn_how_to_lose_wajn4RfE5zU6AM84hRTOeI

You have to cut your losses immediately. The longer you wait the harder it gets.

It is like going to the dentist, the more you try to avoid doing what needs to be done, the worse it gets and you might lose a tooth that could have been saved if you hadn’t trying to avoid doing what is uncomfortable. The more you try to avoid going through the pain, the more painful it will become.

The quicker you cut your losses, the easier it is, the bigger your chances are to keep your teeth aka trading bank and as a consquence the greater your chance to build an amazing trading career. Will it turn the moment you closed your losing trade? Most probably! – 9 out of 10 times. But that is not the point. The point is to practice good habits that are sustainable for a long satisfying trading career, the point is that the 10th time when the market doesn’t turn, that is the time when you blow your account. The point is you rarely know when the 10th time happens. And yes, the 10th time can happen 5 times in a row.

So, yes could you have a better win – loss ratio if you let the trade run into a loss and hope it will come back? Yes you will. But it will kill your profit loss ratio and your trading bank over and over again. And that is neither sustainable nor satisfying. Especially when the 10th time happens 5 times in a row.

Cut your losses, my friend – do it now!

With a toast to your trading profits

Mandi

When the trader is greedy they think “what if the market moves another 20 points”, when the trader is fearful they think “what if the market is turning around now and I lose everything?” They try to avoid the discomfort of regret which makes them blind like driving in foggy conditions.

So, the trader’s performance is heavily impacted by what they think and what they think is heavily impacted by their state. Usually traders are euphoric on days they make profits and depressed on losing days, but they need to separate their mental condition from their account condition.

Human beings think in contexts and compare what they have now with what has just been. So, if a trader just made a $1000 loss and now they are in a $800 profit, they most probably don’t take the profit because they want the additional $200 to get square.

But if your previous loss was $600 then you most probably are happy about the $800 because now you are $200 in net profit.

This type of thinking is counterproductive because just like the famous coin toss example, the current trade has nothing to do with the previous trade. Each trade should be treated, managed and evaluated as a stand alone individual trade.

Often it is the trade where you just wanted to make one more point before you close out that turn into the worst losses. It is much easier for the human psyche to cut a trade that went into a loss immediately than to cut a trade that was in a nice profit.

That’s why you need a tactical approach to your trading, a documented step by step clearly laid out strategy, and based on those you can analyse your performance metrics. Having these in place will help shift your emotional state to a rationally thinking state.

With a toast to your trading profits

Mandi

Going through some of my old diaries and found some wisdom from my golf coach that I had totally forgotten about:

“The harder you try the more of the wrong muscles are taking a message and the more you screw up your golf shot.”

“Empty your mind, get 1 key thought that you repeat over and over. Bad golfers have a whole lot of stuff going through their mind, that throws them off balance.”

“Find your inner balance by emptying your mind and focusing on 1 key message that you give to your brain instead of thinking of the last time you screwed up this shot”

Oh golf and trading are so alike, one day you are a hero, the next day you just can’t get a shot straight down the line..

That’s why we love it so much..

With a toast to your trading profits

Mandi

The problem with a loss is often not the loss itself. It is the vicious cycle that unconsciously gets set in motion on the back of it.

Before the loss you just do your thing, you follow your rules, you work on generating profits, being in flow with the market and the world. Then bang! The market moves unexpectedly and you suddenly find yourself in a loss. Rude awakening..

Taking the loss is not a big deal, you know you can recover easily. The first loss you take with grace and ease, you do what you know a successful trader does. With the second loss loss you maybe start feeling a bit off balance, discomfort,  self-talk might start whispering in the back of your head now.

What then can become a big deal is when you start feeling so off your game, that suddenly you find it hard to find your rhythm, no matter what you do you seem to always be on the wrong side of the trade. Price moves up, you go long, price drops – loss. You go short to get back in flow with the market, price starts moving up – another loss.

Why is that so?

Well, I could throw some fancy behavioural biases at you, but let’s keep it simple..

If you were to document the anatomy of your post loss behaviour, you will realise that your focus on following your system to generate profits has now unconsciously been overridden by the overwhelming urge of wanting to recover your loss. For example, if you were short and had to take a loss, even if the market is rallying to the upside, you are still feeling drawn to look for shorts, unless you have trained yourself not to buy into your urges and temptations but reverse your position and go with the flow of the price movement and feel how good that feels – to be back in flow with the market..

This change in intention creates a very different set of subconscious trading behaviour.

When you are in flow with the market you are at the cause of your trading, you simply read price action, you enter and exit when your system tells you to no matter what the price is, short long, whatever the market shows you.

When you are subconsciously being ‘puppeteered’ by that urge to recover your loss you are at the effect of the previous experience and you will start behaving in a reactive way whereas before the loss you were ‘running your show’. Now you find yourself being tempted to enter at the same or better price than the trade that you lost on, even if there is no entry according to your system. It has now become all about eliminating that previous loss by recreating the losing trade to make the loss back.

Fear of missing out overwhelms you and you are more focused on what price you could get in than reading to what the market is telling you. You start entering and exiting your trades impulsively succumbing to your urges which gives you temporary relief from the discomfort. That’s why you feel out of rhythm and unable to read the market.

You find yourself holding trades longer than you usually would because you want to make the amount back that you lost preferably in one trade. When you are in flow you just exit when your system tells you to. Now you might start ignoring the exit because that little voice in the back of your head is telling you that if you just hold the trade for 2 more points you would have recovered the loss and maybe made back even more.

The thing is, sometimes you get lucky and it works, but when it doesn’t it can hurt even more.

What to do?

First become aware of what is going on for you after the loss. Do you have a similar experience as described above? If not what is your experience? What are you thinking, what are you saying to yourself, how do you feel?

The thing is we all have an unconscious strategy on how we respond to certain situations in our lives. That is why we keep experiencing the same challenges over and over again until we dissect our strategy, understand how we create certain outcomes and then consciously go about creating a better strategy that creates better results and practicing this strategy over and over again.

After you have dissected each step of your trading behaviour, now take note of whatever the balance is of your trading account. That is your new starting point! Never mind what you had before, how much you lost, how much you won, just start fresh from this number.

But before you get back into trading, there is one more step you need to take. You need to push the re-set button on your state of mind, re-calibrate your brain and also your emotional state, so that you don’t carry the past into your future, but complete the past and start again with a  blank slate and create a better outcome.

Play your favourite computer game, go for a walk, getting something to eat, or even better catch up with a friend or go to the gym or watch a movie. You will find that in the scheme of things that loss wasn’t that bad (unless you lost your life savings, but that is a different story).

Then get back to work, focusing on your system, one trade at the time, creating the life of your dreams..

With a toast to your trading profits

Mandi