Post by Segwin on Jul 13, 2016 15:14:35 GMT -5
I read this article and immediately thought of myself. I hate to lose so much that I will choke a good trade to death so that I can come out a winner now matter how small. Something that I am spending a ton of time on - things to help me stay in a good trade.
To Photize: If you would like to add to the discussion in a positive manor please do. If you want to be sarcastic please take it somewhere else.
The Problem of “Trading Not to Lose” and Overcoming It
Posted on May 12, 2016 by Cory Mitchell, CMT
Trading not to lose is an issue almost every trader will face at some point in their trading career. I was recently reading one of Doyle Brunson’s books–he’s a no limit hold ’em poker legend–where he talks about this issue in the poker world. In order to be a great poker player you need to be opportunity seeking, and not afraid to put your money at risk when there are opportunities to exploit your edge (in trading or poker). Ultimately, great traders, athletes, poker players, or anyone at the top of their field share one similar trait–they aren’t afraid to lose. They go after it, have a killer instinct and want to take every opportunity they can to implement what they have practiced and studied.
Trading not to lose causes major problems for traders. Here’s what it is, why it’s problematic and how to get yourself into an opportunity seeking mindset.
Trading Not to Lose is Fear Based Trading
As traders, we want to have respect for the market, but not fear it. It’s neither our ally nor our enemy; it’s a neutral sea of both potential and risk. Trading out of fear means we are too focused on the risk side, and are unlikely to capitalize fully on the other aspect of the market–the potential.
This results is trading not to lose, which is fear based, and causes problems because the following symptoms (some or all) develop:
•You try to guess which of your trading signals are likely to be winners in an attempt to avoid the losing trades. By skipping signals you move away from your tested trading plan and strategies, and randomize your results. This is known as “trying to outwit” your trading plan.
•Losses aren’t taken when the stop loss level is reached; the loss is allowed to run resulting in bigger losses than planned. Fear is a tricky thing–it can cause us to get more of the very thing we are trying to avoid. When we are afraid to take a loss–because we haven’t fully accepted (and made it part of our internal belief system) that losses are a natural and regular occurrence in trading–we may actually try to avoid taking losses at all and thus run our accounts into the ground. This is an element of “loss aversion” and is covered in detail here: Trading Psychology – Dealing with Loss Aversion.
•Trades are not allowed to develop; contrary to the problem above, the trader is afraid of any sort of loss, or of a small winning trade turning into a loss. The trader knows the market gyrates back and forth, but they are “jittery” and therefore don’t allow their winning trades to compensate them for the risk they are taking. The trader continually gets out of trades at a small loss or profit even though their stop loss is in no danger of being hit at that moment, and the price hasn’t reached their target.
•In general, fear can cloud judgement. In real-time the trader may be so afraid to lose they don’t even see opportunities occurring. If you continually see trades (that you should have taken based on your trading plan) only in hindsight, fear may be causing you to actually filter out information and cloud your perception.
These are symptoms of trading not lose. Trading not to lose is a product of focusing on whether we win or whether we lose. But winning or losing actually shouldn’t be our focus.
As traders it is our job to come up with (or learn) a strategy or strategies, develop a trading plan and then rigorously test that plan for profitability and our ability to personally implement the plan (my personality and circumstances may allow me to implement a plan that you can’t, and vice versa).
10 common mistakes traders makeOnce we have a plan our goal is to trade according to that proven plan; a plan which is researched, backtested and/or traded in a demo account and then traded live with small amounts of capital until the plan is proven successful. Wins and losses take care of themselves, and while we are actually trading we can’t care about wins and losses…we only care about following our plan and trading every valid opportunity our trading plan gives us.
When we aren’t trading that is when we can look at our wins, losses, profitability and trading stats, to possibly make adjustments if needed to the plan (then the whole process of testing those changes begins again). But this doesn’t occur during trading; while trading and holding positions your focus is to follow your plan.
This is much easier said then done, but if you continually pound the following analogy into your brain and let it become a belief, then it will become much easier to let go of the fear, forget about winning and losing, and instead simply focus on implementing your plan while you’re trading.
Believe in Probabilities
While winning is the main ambition for most traders, or at least the most conscious ambition, “not losing” actually ends up being the dominant factor that affects trader’s decisions. This is because it is very easy to have knowledge of risk, but it is something entirely different to believe you can overcome it and to convince your body–which is wired to feel fear in the face of risk–that you can. This requires an internal “belief” change, not just knowledge that a change is required. If either the mechanical trading skills or the psychological work hasn’t been done the trader will be trading not to lose, because subtle fears will creep in, leading to the aforementioned issues.
In an effort to not lose, the symptoms mentioned prior develop, resulting in the trader losing their capital. How can we change our mindset to help avert this?
Consider “the house” or casino in a game of blackjack. Each trade you make represents a hand of blackjack; there is the house (a buyer or seller), and there is the gambler (a buyer or seller on the other side of the trade). The difference between them is that the casino owner has a percentage edge over the gambler; disciplined traders also have an edge, and can therefore be equated to the house or casino owner.
While playing blackjack have you ever seen a casino owner run downstairs to stop a hand of blackjack from occurring because he thinks he might lose on that hand? Never. Gambling regulations aside, casino owners actually want as many hands as possible to be played because they know they have an edge on each hand. Casino owners also know something else: each hand is independent of other hands…anything can happen on a single hand. The casino owner knows we can’t predict which hand is going to make the the house (him) money and which is going to make the gambler money (casino owner loss). All he knows is that each hand is independent–in that anything can happen on a particular hand–and that he has an edge over a great many hands.
Over a great many hands the casino holds a 3.5% to 4.5% advantage (varying by house rules). While the casino may lose tons of hands, at the end of year they are likely to have made 3.5% to 4.5% on all the bets placed at their blackjack tables. The more bets placed, the more the edge is exploited, the more profit they make.
The bottom line is that traders need to adopt the “casino owner mindset,” realizing the result of each trade is unpredictable and therefore every valid trade (within the context of the trading plan) must be traded. Also know that trades are independent of each other. While you may have a string of losses, that doesn’t mean there is something wrong. Allow your edge to play out over many trades. Trust your edge, as the casino does, that over the course of a week, month and year your edge–if adequately tested–will produce a profit.
No single trade matters to a pro trader; whether it is a win or loss it makes no difference. The only thing that matters is exploiting the edge and taking valid trades, because over the long run all those losses and wins will make the edge (profit) materialize. And the nice thing about trading is that traders can create a much larger edge than the casino has.
Reading or understanding this analogy won’t create any change in behavior, it needs to be incorporated into your belief structure for change to occur. Incorporate it into your belief structure by meditating on the concepts, write down notes and your thoughts related to it, so that it begins to seep into your brain, overtaking the current belief structures you have about the market, which result in ‘trading not to lose’. Put notes beside your computer, and continually remind yourself to adopt the “casino owner mindset,” and all that it entails.
Trading Not to Lose – Final Word
Adopt the casino owner mindset. If you do so, you won’t care about whether you win or lose a trade. You will therefore be more open to continually seek opportunities. If your system is proven, over a great many trades you know you have an edge and profits will come. Take every valid signal you can, so your edge materializes. Think of it this way: if you know you can win 60% of the time by guessing heads on a coin flip you’d be trying to get as many people to bet you as possible. The same goes for trading; if you know you win about 60% (even 51% of the time, or 40% if you make more on your winners than you lose on your losers) of the time you should be taking every valid trade you can so you can exploit your probabilistic edge. If you try to figure out in advance which coin flips or trades will be winners and losers though, you become the sucker.
For more on these topics, see the interview with Mark Douglas, trader and author of The Disciplined Trader and Trading in the Zone. His books are definitely worth the read, and this video discusses some of the topics from those books.
By Cory Mitchell, CMT
