When thinking realistically, most new traders will acknowledge the fact that they will encounter losses, and that not every trade will be a winner. So why is it that many go into shock, devastation, and disbelief when they encounter losses? Lesson in Trading Psychology.
There are many factors involved, but these emotions generally present themselves when there is a single, cataclysmic day where losses are tallied to amounts that were imagined or expected. These losses usually are not tied to any significant market movements, but due to excessive trading, trade reversals, and the desire to overcome and erase losses that have already been realized. This narrative has become an all too often occurrence in traders who are just starting out. Many may even consider it a right of passage as so many who watch the markets have experienced such an event.
[bctt tweet=”Trading Losses: an Honest Discussion in Trading Psychology #trading #market $STUDY”]The question is: Despite so many warnings, why do so many traders regress into a day of revenge trading? This can be a day where all trading rules and guidelines are thrown out the window and randomness prevails. The answer is simple: Losses are exhausting. They shake the confidence that has been built and can drain one emotionally and physically. The difference in emotional effects between a profitable trade and a losing trade can turn a trader’s mental outlook around completely, for example, turning a disciplined, strategic trader into one who forces trades because they feel they must overcome their losses immediately. There are many psychological reasons working in the background, but nevertheless the impact can be nothing short of devastating.
How could one possibly avoid this scenario? The keyword here being: possibly.
First, it is important to be cognizant that this is a common occurrence in the trading world. Keeping an eye on trading volume is very important. If a trader were to suddenly start exceeding their average number of trades even though no new market conditions have presented themselves, or without a change in strategy, it may be a good idea to cease trading temporarily. Very rarely does over-trading yield positive results.
Second, take note of patterns and setups that have not proven conducive to the trading method at hand. There is nothing wrong with a ‘resting period’ where further analysis can be made to evaluate a strategy. Double checking support and resistance levels, projected ranges, and other metrics that are necessary for a method can provide further peace of mind in periods of uncertainty.
Lastly, ensure that a method has clearly defined targets, both for profits and for losses. A daily loss and profit target can help enforce discipline in the event of consecutive losses, or out of the ordinary events. A daily loss target that an account can safely absorb can provide a value for re-evaluating the method and will also allow breathing room for handling the losses psychologically to avoid further, un-disciplined losses. A daily target for profits can also aid in preventing over-trading as some may feel invincible due to the emotional boost of a profitable run of trades. Markets do not provide opportunities every moment of the day, and these periods are better utilized for reflection and analysis rather than forcing trades.
The idea is to avoid trading from the gut, prevent the influence of misleading intuition, and trade only according to a strict and clearly defined methodology rather than hastily trading to recover realized losses without considering actual trading opportunities.
Please be advised that trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessary indicative of future results. This matter is intended as a solicitation to trade.
