Mind of a Trader Part 1: You Have A Great System, So Why Are You Losing?
Editor's note: ‘Mind of a Trader' is a series of articles covering the emotions involved with trading. It is authored by Norman Hallett, CEO of Subconscious Training Corporation, which is widely known for ‘The Disciplined Trader Mastery Kit'.
You've done your homework; you spent countless hours seeking out the right guru (or piecing together your own system) and weeks monitoring your guru's daily trade picks (or paper-trading and back-testing your homemade system). You've done it by the book, no seat of the pants trading for you!
OK, now you're confident. It's time to put your money where your homework is. You've had your coffee and your first trade signal is before you: Confidence high. You made your trade and took a loss, that's not a problem.
You understood before you started that successful traders both win and lose and “losing is part of the overall winning”. You've also heard more than once that “successful traders don't win on every trade.”
You move on from your last trade and make another one, and it's another loss. This one hurt your pride a little because you got stopped out early in the trade and then the market rebounded, which would have hit your profit target if you weren't stopped out. This happened even when you placed your stop right where your system suggested you should have.
You had a feeling that the early weakness in the market was just profit-taking from the previous day's trading, but you're trading a system and you must stick to it.
After a good night's sleep and a few mouse clicks, your new daily trades are in front of you. “Hey, this one looks good! It has a little bit more risk than yesterday's trades had, but look at that profit potential!”
With a smiling face, the trade is executed. With a nice start to the trade, you're feeling good and you've moved your stop to breakeven, just like your system said.
Then a surprise piece of news, the market reverses and blows through your stop. This leads to an unexpected loss. Is something wrong with the system? Has the overall market “personality” changed, affecting the system to the core, rendering all back-testing irrelevant? Your confidence turns to doubt and you decide to “watch” the next trade... it's wise to make sure the system gets back on track before you “throw good money after bad”. After all, that's what a conservative trader would do.
The next trade wins, and you beat yourself up a little because you know that when you started your “live” trading, you made an agreement with yourself to take the first ten trades “no matter what", and here you wimped-out and missed a big winner that would have ensured that you broke even.
Your emotions are ruling your trading and it has created an out of control trader.
The above scenario plays out in every trader from time to time, newbie and veteran alike. Winning traders sense what is happening and nip it in the bud. They spend time every day working on “the discipline of trading”. They read a chapter in their favorite psychological trading book, scan the “ten commandments of trading” that hangs on the wall over their desks, or listens to their mental training software for traders every day before trading begins.
We know that there are many more losing traders than winning traders, but it's seldom about the trading system.
There are plenty of strong systems, yet most traders that have traded these systems have lost. This is because they were not in control of their emotions.
It has been preached by every lecturing market guru since the Aden Sisters danced to the music of the gold market. You need to limit your losers and let your winners run.
Go ahead and hire a personal trading coach and likely the second thing they will utter, (right after “Trading is speculative and only risk capital should be used.”), will be, “Limit your losses and let your winners run.”
“On a roll”... “Go with the flow”... “Ride the wave”... “Get out while the getting's good”... we've heard both sides of those golden words massaged in numerous different phrases. We get it.
During my trading and coaching days, I would re-visit students that I trained weeks or months previously and, lo and behold, I would discover that many of them were actually doing the opposite. They were letting their losses run and limiting their gains.
After a while I wasn't surprised to see this. I would go into a refresher visit expecting to see this rule repeatedly ignored. I would ask the students “Why?” and there were many different stories but one main theme. All the traders, in some way, had gotten out of emotional control. During their trainings, I had made sure that they did extensive back-testing on their systems and I did that because I knew the more they tested and saw that their system would have been successful, the more they would trust the system and have the strength to follow its signals. Especially through rough periods.
Apparently, simply back-testing and seeing potential results wasn't enough to keep these traders in emotional control. What I had been missing was that these traders were taking the losing personally!
These new traders had been seeing losing trades as reasons to let negative thoughts into their heads. A loss would mean that all the articles they read about “gambling” market traders may be true, not to mention all the accusations from family that they were crazy traders.
This kind of negative thinking makes it so you don't want to take a loss. If you take a loss, maybe you're that much closer to that idiot trader that you've been accused of being.
So you enter a trade and it starts to go south. As the market heads for the stop, you start looking around at the news, or a chart of a “sister” market or share that's showing strength, searching for an excuse to make it OK to lift the stop. You always end up finding something to justify your reason. “Hello...Please cancel Bean Ticket 4154.”
Now you're thinking that if the market comes back, you'll be the smart guy or gal that made the right move and turned a loser into a winner. However, what you REALLY just did was turn a potential winner into a potential loser. You may have had a winning trade, but you will lose in the end.
It's not about you. It's about the market. If you don't take your emotions out of it, there's no chance things will work out. You must see yourself as a trader, not someone who is becoming a trader. There's very little room for mistakes in trading; leverage ensures this. If you are going to play in the big leagues, you have to do what big leaguers do right from the beginning.
Do all your practicing on the paper-trading playing field. Once you put your money up, you either do what your tested system tells you to do or pick a different profession.
If you're not training mentally, you're not giving yourself the best chance to succeed.
Learn more about managing and disciplining the emotions of a trader.