One of the things that can cause major problems in your trading is the failure to accept and recognize any losses you might have. This might sound like a very simple thing, but hear me out.
You will often hear from traders that losing trades don’t matter. That’s all part of the process. This is definitely true. Trading means taking risk and taking risk sometimes means things don’t go the way you planned. The extent to which you accept that in your trading mindset and see the process of taking losses as part of the business of trading can go a long way in defining your long-term success in the markets.
That’s not what I’m talking about here, though. I refer rather to a more personal reaction that can sometimes come about in trading. It’s a kind of denial reaction we can have, especially in the face of a major loss.Â
Have you ever just not even looked at your account balance after a particularly bad trade? Just kind of turned your back on the whole thing? I know I have. It had nothing to do with the actual loss itself, but rather with the way the loss was taken. I had ignored my rules. The market hadn’t beaten me. I’d beaten myself. By walking away and not recognizing the damage done to my account I put myself in to a state of denial. As long as I refused to look at my P&L I could, to a certain degree, keep from accepting that I’d been stupid and done things IÂ should not have done.
This kind of denial can be dangerous. If you do not accept that you made a mistake – were wrong – you don’t give yourself the opportunity to learn and correct. If the impact of foolish actions are not allowed to impact on your trading psyche, you potentially increase the odds of doing something stupid in the future.
Why the denial response?
I think at least part of it is equating trading losses with being wrong. A lot of us have the problem. If the market hands us a loss we take it as having been wrong when the fact of the matter is that we could have done everything right and things just didn’t work out. That’s part of taking risk.
It’s more than that, though. If you are intellectually aware, you will know when you mess up. In fact, you’ll probably know while you’re doing it. You get that nervous feeling in your gut as you make too big a trade or jump in on a trade that isn’t compliant with your methodology. When you ended up taking a large loss it sort of confirms a set of bad feelings you had toward what you were doing when you put the trade on in the first place. That implies some personal flaw which is something a lot of us have a hard time dealing with.
Whoa! This is getting a little deep.
Anyway, my point is this. Take your medicine when it happens and accept it. Learn from the lessons you have just taught yourself so you can move on a stronger trader.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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