Meditation on how to take a loss
One of my main objectives in my work with traders is to help people understand what trading is in general, what it is a profession, a kind of activity, what are the peculiarities of this occupation. And not just to provide information about how the human psyche works. In addition to all this (of course, this is important material), there is also such a component as "trader's mentality", which, to my great regret, is often neglected. Beginner traders are especially guilty of it.
And because they ignore this essential component, they never reach the point in their professional development where they can provide themselves with predictable results in the marketplace.
Not to predict market behavior, but to achieve predictable trading results. These are two big differences.
However, in today's article, I want to talk about the inevitability of losses. And I want to give you a simple practice that I encourage you to do immediately after you get a losing trade. Next, we'll look at how it works and why it's effective.
But first, a brief preamble.
Struggling with risk management
Once upon a time I heard an interesting saying attributed to a prominent Russian psychologist. It reads: "all children are born geniuses, it is adults who make them fools. As with any controversial hypothesis, there is some truth in this one as well.
The fact is that so many of us were brought up in austerity. And the main system of our upbringing is based on fear. On the principle of "don't do that, or else..." What follows is a colorful description of the likely and inevitable punishment, according to the principle that the scarier the better. From childhood we are used to being afraid and expecting punishment for wrong actions.
As we grow up, we build a kind of mental protective wall around ourselves. It simultaneously helps us to protect ourselves from suffering and to get what we want by asserting our own position.
We begin to base our self-esteem on the fact that we stubbornly hold to our opinions, even when we know perfectly well that they were wrong. We sincerely believe that our values and our worldview are the only true ones. We become accustomed to taking up a circular defense and waiting for the outside world to attack.
When we come to the market, we face a completely different reality. We have to learn to admit that we are wrong. And the sooner we do, the cheaper it will cost us. Accordingly, we also have to learn to accept losses. After all, they are the most precise and concise expression of our wrongdoing.
This openness to vulnerability is completely foreign to many of us. That is why risk management is one of the most difficult things in trading. Our natural reaction to such openness is to fight it. We've been used to shutting down and holding the circle of defenses all our conscious lives. And here we have to agree that I'm wrong! For many, this struggle ends in great financial loss.
This disgust at one's own mistakes, coupled with the pain of losing so much money, can then develop into a deeply depressing experience - a real psychological trauma that can literally crush a trader psychologically and provoke an aversion to trading itself. In this case, it will be very difficult to force oneself to trade.
If this happens, you need to take a long break from trading. It is better to be patient and recover than to engage in self-abuse and finally wear yourself out mentally. In parallel with the break you will need to do a lot of internal work to get back into a resourceful state and resume trading.
Part of this inner work is to learn to look into the nature of your thoughts and emotions by asking yourself the right questions. And besides, learning about the nature of the market is also a huge part of this work.
Losses are inevitable. Take it for granted
The market is unpredictable (fortunately). But there are times when its behavior coincides with your expectations. Those are the moments when you make money. And it is at such moments that it seems to you that you have found the "Grail". You have learned to understand the market. And the more you believe in it, the greater your disappointment will be when the market changes its direction and you continue to move in the same direction.
Very often you will be right about the general direction of the market, but you won't get into the amplitude of that movement. You will open a position, and the market will first take out your stop, and then quietly move in the previously assumed direction, but without you. It is at such moments traders have an idea about dishonest brokers and "stop hunting".
And you might say, "in that case, it's better not to put a stop loss. But the problem is that in this case, all it takes is one single time when you misjudge the situation (and it will happen, believe me) for you to lose most of your deposit. If the market does not turn around and continues to move against you, it will be very painful.
Or you can try a different approach. Increase the size stop. But in this case the entire trade will require revision. Otherwise, literally two consecutively losing trades can wipe out the results of the hard efforts of several days.
You know very well that a reliable strategy is a strategy that, in conditions of market uncertainty, allows you to increase profitability with relatively small losses.
But no matter how much you increase profits, you will never get rid of losses. Losses are inevitable. They're just part of the business. "You can't make an omelet without breaking an egg" is as old as the world, but it's also true. So if you don't change your attitude to losses, if you don't develop the ability to openly accept your mistakes, you're going to have a very difficult time in trading.
Simple practice after a loss
One of the reasons that losses have such a strong negative psychological impact on you is that you associate yourself with them. To you, failure in a particular transaction is evidence of your "badness. And all of your previous experience, including as a child, tells you that bad behavior must be punished, and that punishment is inevitable. It's so deep in your subconscious that if the punishment doesn't come "from outside," we punish ourselves. That's the way our mindset works.
And here's a little practice I suggest. Do this immediately after losing money.
Usually after losing money, what do you do? You perceive and immediately interpret what has happened based on some sense-making system, familiar from early childhood and maximally adapted to reality. A negative emotion occurs as a reaction in response to the meaning you give to a certain event or circumstance. Without your thoughts about something, there can be no emotional reaction to it.
By understanding this cause-and-effect relationship, you can now to be aware of the flow of your thoughts every time you lose them. Algorithms of how the story plays out in your mind that the loss you received sucks. That you are disappointed or deceived by the market in your best expectations. That you are a loser and a loser, and so on.
Now reassure yourself
You are used to perceiving a losing trade as a failure. You might ask, "How else would you perceive it? I already told you how. As an inevitability. Just like rain or snow, winter or summer, heat or cold. In other words, as a personal failure, you can consider what you could and should have controlled, but for some reason you did not. And that's with a big stretch. Can we say this about the market? You could have controlled it? The answer is obvious.
But you could control your actions. So you controlled the size of the loss. What's the problem then? Controlled losses are necessary, they are part of the trading process. Could that be your own fault? No.
Go with what they call "the other way around. If you have the idea in your head of what a loser you are, you need to disprove it.
Remember that there are many examples to the contrary in your life. Find something to thank yourself for, something for which you can be justly proud. Even all the biggest losses in trading can't take that away from you! And certainly the results of what you can't control are in no way indicative of you as a worthless person.
There is no need to try to prove or disprove anything. Just go back mentally to past positive experiences of your own. It will allow you to challenge negative thoughts. Most likely, if you are able to do this, you will feel a rush of positive emotions. Fix mentally this state. With some consistency and practice, you will be able to induce this state almost automatically, at your will.
When you feel the lightness of this inner state, you will realize that you have become both open and invulnerable to loss. They no longer have such a heavy psychological impact on you. This energetic state of lightness cannot be analyzed or rationalized. Just accept it and feel it.
Changing deep behavioral patterns
This simple "after-loss" practice will help you change your attitude toward the experience. When you approach trading with this attitude, EGO disappears from your trading. Short-term losses become part of the process, its inevitability. Or, as the pundits would say, a springboard to future victories. Where you deny them the opportunity to destabilize you on an emotional level.
Studies show that it can take anywhere from 21 to 66 days to form new habits or behavioral patterns. So if you want to change a certain aspect of your life, you not only need to learn new information (like reading this article) but also practice creating new behaviors. It is this linkage that underlies the cognitive-behavioral strand of psychology that I love and constantly apply in my work.
We've been acquiring our old habits for years. You can't change them instantly. But now you know what to do. Practice and you will succeed in trading. That's what I wish you.