Trader Mindset

Losses are important in trading

Pullbacks are important for the market. They serve to flush out rampant optimism and reminds everyone of risk. People who think about risk make educated decisions. It keeps the market efficient. A market that continues without pause creates an imbalanced demand and supply equation. People feel comfortable buying higher and higher, people forget about risk and everyone is long from overvalued prices.

When the market finally corrects, it tends to be much quicker and much more fierce. If everyone is long, who is left to buy when the market finally drops?

Your equity curve is like a stock chart, you need pullbacks along the way. Why? Because those are when the real lessons are learned. Losses reminds us of risk, it refocuses our attention on the type of game we need to play in to win in the long run. Losses motivate us to research more, to think more and to correct our mistakes.

Compare this to what winners do for us mentally and emotionally. Winners make us complacent, cocky, arrogant, maybe even lazy. We feel we know everything there is to know about the market. We give ourselves the “I made it!” speech. After all, who needs to research when we are already making money, right?

I guess what I am trying to say is embrace losses. If you embrace them, you won’t fear them. If you don’t fear losses, you can take them naturally and not let them get out of control. This is more of a reminder to myself than to any of you. But if you find it helpful, well that’s cool too.



Trading and discomfort

I cut winners early because I want to lock in a profit.

I hold on to losers because I don’t want to realize a loss.

I ignore system trades when “feeling” afraid, only to see those trades win.

But, this is not a defect of my personality (or yours). Centuries of survival instincts have made the human mind very irrational when dealing with matters of money. These same irrational money tendencies have been studied in apes which imply that risk/reward instincts stem from a very ancient and un-evolved portion of the brain.

When dealing with issues of survival, information bypasses the logical thinking and shoots straight to the fear center, otherwise known as the fight or flight center located in the amygdala. The same instincts that keep us safe ironically makes trading a very dangerous profession for the the uninitiated. Emotional impulses desperately seeking comfort and security hinders the ability to make logical risk decisions. We can’t take a loss because it goes against untrained human nature.

This means that proper trading is very difficult. Usually the correct trading decisions are very uncomfortable as they stand against the mind and body’s natural urges. Traders must suppress a lot of their instincts and intuitions to make money. A lot of what “feels” right in the market is completely wrong.

The good news is that due to neural plasticity the brain can be trained with focused practice. As martial artists train and build new connections, it forces the brain to adopt new automatic emotional and physical responses when faced with certain kinds of stress.

Indeed, it can be done but you need focused and dedicated practice, and most importantly, time. Simply understanding “how to trade” is not enough, you need enough experience and practice that your brain carves out new pathways.

If you are struggling, don’t rush it. Make sure you have enough capital to sustain through the learning curve. Adopt good processes and practice, practice, practice. Eventually your brain will adapt, as it was designed to do.