Staying Disciplined While Taking Losses

Articles on Trader Psychology by Rande Howell, Trader Psychologist





The Anatomy of a Loss

You know the feeling.  You take a loss and feel the sting.  But you calm yourself and rationalize that taking a loss is simply part of trading.  You’re sticking to your plan.  You know the drill. You’re good with it.  Then you take another loss – and it really stings.  Now you’ve got several losses that need to be made up in order to get back to where you need to be.  An unexplainable frenetic energy begins to swirl in you.  An urgency to not take another loss creeps into your trading mind– and you don’t even notice it as you focus on looking for another trading opportunity.

A potential set-up avails itself.  It’s not everything you want, but you take it.  And immediately it goes against you.  You can’t let this fail or the losses will stack up on you.  A sudden plunge, and it’s getting close to your stop.  But you see the potential in the trade and believe it will turn around if you just give it a little room.  You convince yourself that this trade just needs a little room and it will bounce back.  And, man, you just don’t want to add to your losses – and you’re sure it will turn around.  It doesn’t.  Instead, it just keeps heading the wrong way.  Now it’s nearing your new stop.  You move it, believing it will turn around.  So, you throw more good money at the loser.  It hits the stop and keeps diving.  You don’t want to lose!   “It’s bound to turn around”, you think.  Deeper and deeper you sink into the loss abyss until a small loss has turned into a major blood let.

After the smoke settles and you’ve come back to your senses, you ask the question, “Why do I keep doing this?  Why do I keep chasing losers when I know better?”  Good question.  Let’s take a look at this common performance problem in trading.


Invisible to You, Your Survival Instincts Are Killing You

There are two parallel problems going on in this trader’s performance.  The first is the Evolutionary Psychology that he brings with him from his Caveman ancestors.  The second part of the problem is the trader’s personal performance psychology around winning and losing in a circumstance where randomness is the greatest influence over outcome.  First, let’s look at the baggage you bring with you from your Caveman ancestor’s days. 

In those days, life was full of danger.  There were predators seeking us out, such as the saber-toothed tiger.  And there was the challenge of acquiring food.  We, as our ancestors, hunted large game such as the wooly mammoth.  Big, dangerous game.  Escape from predators and surviving a hunt was a challenging quest.  In these times of the formation of core attributes for survival, winning was essential – and losing literally meant you died.  Winning and losing in the game of life was far too important to leave to chance.  So, survival strategies evolved that focused on our ancestors winning the outcome of engaging the Uncertainty of an attack by a saber-toothed tiger or taking on a huge animal so that your clan could have vital nourishment.

Over time, the survival strategies of winning (prevailing) and not losing (dying) evolved into instincts.   To win and not lose meant that early man had to control outcome (all those encounters with the unknown).  It meant that he also needed to predict outcome as a way of surviving (“that trade is going to turn around, I just know it”).  It also meant that early man learned to be highly biased in his belief that he was going to win the encounter and that he would not lose (“I’ll just move the stop”).  These were biases that colored their mind when engaging the danger of an uncertain outcome.  Many times, events did not turn out their way, but their biases had become instinctual so that they believed they were in control, were right, and could predict outcome even when the results did not align with their instinctual biases.  That’s how strong biases are.  If clear thinking were to get in the way of the instinctual biases from our past – it would be swept away like the one voice of reason in an angry mob.

And you bring those ancient biases of your ancestors to trading.  Just like your ancient ancestors, you have a survival instinct to control outcome (be right), win and not lose, and to predict outcome.  The problem is that subconsciously (in the Emotional Brain) you are trying to apply these directives to a world that is Uncertain.  A world where you have little control over outcome, whether you win or lose, or whether your predictions will come true or not.  That is why your survival instincts are killing your trading.  Eventually you will have to retrain these core survival traits of the human being bequeathed to you through evolution and replace them with new understandings that allow you to work with probability, rather than the illusion of certainty. 

Personal Psychology Is a Suicide Mission Too

Most of us grow up and adapt to a world that is centered on competition, winning (and not losing), conquest, making money, and being right.  I played American football at a high level in high school and on the door of our locker room was a sign – “Winners Never Quit, and Losers Never Win”.  We were taught to win, to dominate, to be a man, to show no emotion except anger while playing and joy when something happened good.  And what was drilled into our formative minds was to avoid the shame of losing.  We had to be winners!  Our brains and minds were shaped by these cultural norms.

This is an institutional shaping of personal psychology.  Football in this case, but the attitude of winning is rampant.  For me, it also happened at home, where winning was everything.  In my home, both my mother and father expected me to be a straight A student, a great athlete, popular, and only date good looking girls (as approved by my father and mother).  I had to be a winner.  The family’s honor was at stake.  And I could not lose and bring shame to the family.  (This is quite a psychological pressure cooker to spend your formative years in!)  Everybody will have their own version of this psychological shaping story from their youth.  Winning was everything.  And that kind of thinking was cultivated.

Now, imagine bringing that mindset to trading, where you do not control outcome, nor whether you win or lose.  That “winning” mindset is going to produce disaster.  The more you are exposed to the randomness and Uncertainty found in trading, the more you realize that the psychological mind was shaped all wrong for success in this venue.  Trading requires that you let go of your need to control, let go of your understanding of winning and not losing, and realize that you may not be right when predicting what a trade is going to do. 

The old paradigm was about a state of mind that produced certainty – and the outcome was victory (making money).  The new paradigm of success in trading is about controlling the state of mind that you bring in the arena to manage uncertainty…where winning and losing are not part of the success formula.  Instead, success is measure by performance.  Do you perform well as you engage the ambiguity of Uncertainty under the stress of risking capital?  Letting go of control over outcome opens a new possibility.  First, believing that you can control outcome by winning is revealed in trading to be what it is – an illusion.  We bring the illusion of control to trading from both our Evolutionary Psychology and our Personal Psychology.  A double whammy. It was a useful way of acting in the world, at least until you began learning how to trade.  After a while, traders learn that they do not have control.  And they have to give up control.  They cannot make things happen – and that old way of thinking will produce disastrous results.

Your primitive brain will resist your trying to change the success model needed for trading.  It has deeply entrenched neuro-pathways that have locked in ancient biases that don’t even register on the radar of your awareness.  Your trading account and its health (or lack thereof) will reveal these self-limiting primitive beliefs (called implicit beliefs) that leave you shipwrecked.  Your trading account is your truth meter.  Your brain will lie to you.  But your trading account will not.  It will tell you the truth.  But you have to be ready to listen.

Mastering the Mind that Trades

The mind you bought to trading is not going to be the one that will create success in trading.  Your trading account will show you the beliefs and biases that have control of the mind you trade with.  The beliefs that drive the old paradigm of winning and being right, thereby controlling outcome, will not work no matter how much you want to believe them.  The tenacity of the biases and beliefs that you inherited from your ancient human ancestors and what you learned about being a successful human are embedded in your personal psychology. 

Trading will open the possibility of self-mastery to you.  You will have to master the emotions of trading and learn how to use emotions to build a probability-based mind for success in trading.  That old mind simply is a bad fit for the demands of trading.  This is what I call the intentional mind.  It will be very different from the winning mind you brought with you, where winning became your consistent performance.  Now you face the luck of landing on the right side of probability (win) or the wrong side of probability relative to you (losing).  You control neither of these.  But you truly can learn how to control the emotions that give rise to the mind that you bring into the moment of NOW.  This is the psychological edge you need to be a successful trader.  So, the kind of success you are seeking in trading is going to require a very different mind than you brought to the game.  It’s a change at the core of your psychology, rather than a trick you learn or knowledge you acquire.  It is a change in your beliefs as you engage Uncertainty.  It requires self-mastery.  Who would have thought that trading, with its emphasis on making money, would become a journey into your personal self-mastery?  Tell me that the Cosmos doesn’t have a sense of humor.

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