HOW TO LOVE YOUR LOSES
In this article we are going to discuss the psychology of the losing trades, and the tools and view I use to approach them.
When we understand what a losing trade really is, you don't fear them anymore or don't try to avoid something that is unavoidable. That way you can LOVE YOUR LOSES.
CHANGING THE DEFINITION OF A 'LOSS'
The best way to fix the emotional pain when price stops us out is to look for the root of the problem, your mind. The information that the market reflects (upticks & downticks) is completely neutral, is no good or bad. Your approach must be the same with any kind of trade, winner or loser; try to think like the market perspective.
Losing trades are the cost of doing business, that’s all, losing is part of the game and the key is how you lose. Said this you can qualify losing trades in two categories, in reality you don’t need to care if a trade is a winner or a loser (is the same) there are two categories for any kind of trade, if the trade followed the rules of your trading plan or not.
No more no less, when you follow the rules of your plan, means that you have completed one important step to become a serious professional trader (designing and testing your trading system) and are ready to jump to the second most important ability of trading: EXECUTION. This is a deep topic that I will cover with the next week article, “THE REALITY OF BEING A TRADER”
So if you follow your plan is a good trade if not is a bad trade, independent of the outcome. That’s the key.
THE ROOTS OF PAIN
Two of the biggest reasons of why trading is one of the most difficult professions in the world are:
1. When we take a loss, all our negative energy stored in our minds that relate losing something or being wrong with emotional pain release. So we feel bad and don’t want to take a loss (something impossible) causing bad execution and bad results and a downward spiral to hell.
2. You can be making money and trading very bad and trading good and losing money.
The number 2 we will cover the next week; let’s focus on fixing number 1.
One possible way to fix the emotional pain shock that you get when a loss happens is to explore your mind with a psychologist, that way you can find and remove the associations of your childhood and beliefs that cause you to feel pain when losing or being wrong in something. That’s the hard way.
The other way is to change your beliefs and interpretation of “loss” in trading terms.
Losses are the cost of doing business, like a casino can lose some hands vs. a good player in the blackjack table, but what the casino does? Congratulations the player and invite him to continue playing, because the casino knows that in the long run, the edge is in their favor.
So let’s suppose that you have done your homework and your system is clear and tested (you are not changing the entry rules after 2 trades etc…) and the numbers you get are 70 % wins 30 % loses / 2:1 reward vs. risk (For every dollar you risk you win 2 / With a 1:1 R:R is still a good system)
Then, I’m going to show you how if you follow your plan, in reality every trade is a winner: You make 10 trades, win 7 lose 3 – you win 7x200 $ = 1400 $ and you lose 3x100 $ = 300 $, so you end the month with 1100 $ net dollar gain.
So if you divide 1100 $ by the 10 trades that you make (winners & losers) you are getting by average 110 $ for every trade that you make, INCLUDING THE LOSING ONES!!
Understanding this is crucial, because that way means that you are thinking in probabilities, main mental quality to perform like a professional. If you understand this you’re a going to control your risk, don’t feel bad about a loss, and pulling the trigger when the signals appear!
Think about it, this is what means to be a pro, have a system tested that you are comfortable with and capable of follow.
Some of the best traders I know win less than 50% but when they win they make 8 times or more of what they lose. Depends of the personality, of course that’s entirely a new topic, but don’t get fooled thinking that perfect numbers exits, the casinos make a fortune with a 2,5 % edge over the players…
So knowing that loses are the part of doing business, you must not ever take a loss personally, or feel bad about losing a trade. If you are following your plan, then is a good trade and losing trades are just discipline tests, and you pass the test.
Here is a psychology tool I use to LOVE LOSING TRADES :-)
Every situation can be summarized to 4 events:
A) YOU LOSE A TRADE (event)
B) YOU ACCEPT THAT LOSING IS PART OF THE GAME (interpretation)
C) YOU DON’T FEEL GOOD OR BAD, BECAUSE IS NOT PERSONAL (emotional response)
D) YOU KEEP FOLLOWING THE PLAN WITH DISCIPLINE (behavioral response)
This tool is gold; use it in your life…
Event A) is going to happens, that’s 100% sure, so you must change what is in your control, B) interpretation, and then you will have C) and D) to be appropriate to your objective of consistent trading.
KEY ASPECTS TO REMEMBER:
• LOSES ARE AN UNAVOIDABLE PART OF TRADING
• ONE TRADE MEANS ABSOLUTLY NOTHING, THINK IN THE LONG RUN
• DON’T TAKE LOSSES PERSONALLY, LOSE YOUR EGO
• FOCUS ON THE PROCESS AND FORGET THE OUTCOME
I hope this article helps you in your day to day trading and life, anything contact me at [email protected] and stay tuned for the next week article, thanks!