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Markets not gone your way Try this

Delve into the psychology behind trading setbacks and learn actionable strategies to finetune your mindset for a better outcome.

Reading time: 8 minutes

Trading level: Beginner


Source: Shutterstock

Every trader experience times when they’re out of sync with the markets and when losses accumulate. Let’s have a look why this can occur in more detail. Also, let’s discuss some specific techniques you can implement to assist you to get back on track if you’re experiencing losses in the markets.

Begin with analysing why the loss has occurred.

Accepting losses is a part of effective trading. However, it’s important to assess whether your trading system needs to be tweaked, or whether the core reason for your losses is due to your mindset.

Are you following an effective checklist or trading plan? If not, then this may be the source of your issue.

There are some core trading skills that are essential to master. However, equally as important is developing the right mindset. Trading can be difficult, frustrating, and incredibly exasperating from time to time. There will be occasions when you will question your own judgment and wonder if you really have made a wise decision to trade the markets. It takes a lot of courage to persist. This is especially true when you’re in a drawdown period.

Here are some possible reasons you might be experiencing losses:

Reason 1: Revenge Trading

After experiencing a loss, many traders hope to recoup the losses they’ve made. They react emotionally and are less likely to follow careful risk management procedures. It’s something that trader Bill Moore calls a “put it all on black” philosophy. It’s common in games of chance to see this in action.

Reason 2: Trading for excitement

Some traders relish the thrill of trading, even when they’re making losses. They take the totally irrational route of continuing to trade - presumably because they are trading for excitement.

Trading for excitement is a real problem for traders. Research by Gervais and Odean suggests that this is particularly a difficulty for novice traders.

“A trader's expected level of overconfidence increases in the early stages of his career. Then, with more experience, he comes to better recognize his own ability. An overconfident trader trades too aggressively, thereby increasing trading volume and market volatility while lowering his own expected profits.”

As the saying goes ‘There are no old, bold traders’.

That’s why trading is an activity for adults with a high level of emotional maturity. As long as the lessons learned from a losing trade outweigh the emotional torment, then it’s likely that you’ll stay around long enough to learn how to trade with skill.

Reason 3: Fear

There are so many things to be fearful of in the markets. Fear of taking a loss, fear of learning a new skill, fear of failure, fear of what others think of your decisions – the list goes on and on. There is one other predominant fear that people struggle with in the markets. It’s the fear of success. Can you visualise how your life would be if your net worth increased substantially? This skill of visualization is essential to attain your goals. To reach greatness, first, you must have the courage to visualise it.

Sometimes fear can lead us into making decisions that are not entirely based on rationality. However, if you can identify the fear you’re experiencing, this can help you limit the impact of it.

The research is overwhelmingly in favour of this and suggests that if you can train your mind to downregulate strong emotions and think with clarity, it can help you become more successful.

By the way, it’s fine to feel strong emotions. This is correlated with better trading decisions. However the problem hits when you stay in those extreme emotions. A study by Myeong-Gu Seo and Lisa Feldman Barrett titled Being Emotional during Decision Making: Good or Bad? An Empirical Investigation even concludes that if you can learn to put your losses emotionally in their proper place and downregulate negative emotions, you’re more likely to be profitable.

The good news is that there are specific actions you can take to think your way out of the struggle with your negative emotions. You can shift back into more stable territory so that you can again experience victory.

What can you do?

Firstly, realise that you are not alone. Every trader, if they’ve been trading the markets for long enough, has gone through a patch of experiencing losing trades. Then, take matters into your own hands. Here’s what you need to do:

1) Manage your emotions

Learning how to regulate your emotions has an impact on your risk-taking behaviour. Overall, emotion regulation was followed by less risky decisions in the research. If you can be aware of the risks instead of stumbling forward blindly, you have a chance of staying in the arena long enough to be successful in the markets. To put it simply, according to researchers, if you can calm down and regulate your strong emotions, you are more likely to experience positive outcomes in the markets.

There are multiple methods you can use to achieve this goal, and we’ll be exploring these in the Master Your Trading Mind Hub over time.

2) Become aware of your body’s signals

Have you ever felt your heart flutter and your belly flip flop when you’ve made a big profit or loss? Have you felt acutely aware of your stomach grumbling when you’re under pressure, or that tension band across your shoulders when you’ve been concentrating for a long time? The good news is that this is a positive sign.

As strange as this sounds, being aware of your own body may have a direct impact on your profitability as a trader. So, if you can be quiet enough to listen to your body, refine your actions, and mentally train yourself, then you’re more likely to experience success as a trader. To quote from a research paper that looked at London-based traders and their performance in the markets, “traders are better able to perceive their own heartbeats than matched controls from the non-trading population. Moreover, the interoceptive ability of traders predicted their relative profitability, and strikingly, how long they survived in the financial markets.”

Just for the record, interoception is your own perception of the state of your body e.g., hunger pangs and heart rate. Whereas introspection is the inward reflection on your thoughts and feelings. Both are important for traders.

So, according to the research - if you can learn to be more aware of your own bodily functions, how you react to stress and aspects such as breathlessness and racing heart – you are more likely to be a trading success. It stands to reason that if you can influence your ability to detect these aspects of your own physiology, then you’re more likely to experience positive outcomes in the markets. It’s the way athletic coaches get top results from their athletes. Coaches train athletes’ minds through training an awareness of their bodies.

So to summarise – if you can develop body awareness and self-awareness about how you’re feeling, as well as learn to tolerate feelings of discomfort when things are going wrong – this will maximise your chances of being a better trader.

3) Reframe the event

Healthy traders use reappraisal psychology, usually quite innately. This involves cognitively reframing an event to reduce the negative emotions you feel. It’s a part of emotional regulation – the big ‘ER’ in psychology. Emotional regulation is your ability to manage or respond to an emotional experience.

You could aim to reframe your losses to be ‘an inevitable part of trading.’ Every trader endures losses, and to excel in the markets, it’s important to accept this inevitability.

The other way you can handle things is to suppress your emotions and imagine that your loss or gain didn’t really happen. This does not work. To quote the research - “reappraisal has an observable impact on decisions, especially after losses, and could be used to train investors to improve decision making process

4) Use introspection

The other component is to think about your losses… really think about them - without interruption. It’s uncomfortable, but the pain will be worthwhile. You need a quiet environment to do this, and you need to maintain your focus on the task at hand. It’s the type of ‘work’ that Cal Newport talks about in his book called Deep Work. If you can think about where you can improve, without distracting yourself when you’re dealing with an uncomfortable emotion, you’re more likely to become a high-performance trader.

5) Keep a Morning Journal

Develop a habit of writing your thoughts on paper. Some psychology experts call this a Morning Journal. Write in your journal about your loss every day for a minimum of a week. Here’s a guide about what to write…

Day 1: Describe your pain in excruciating detail. Let the emotion overwhelm you and pour onto the paper. Don’t shy away from those strong emotions.
Day 2: Write in your Journal: “What did I do well” and “What would I do differently”.
Day 3: Keep describing any remnants of pain that you haven’t yet described. Don't go over the old ground. Add new pain to your Journal about this event.
Day 4: Then, work your way up to asking, “If this situation was totally my fault, then what lessons would I want to take into the future with me?”
Day 5: Talk to yourself about self-care. What can you do now to soothe your body and mind?
Day 6: Do a ‘future self’ post. Start it like this: “It’s May (future date). It’s exactly 5 years since I (insert painful experience here). I didn’t realise it at the time, but that was the turning point for me. Since that event, I…” … and paint a picture about how you want to be living in 5 years. This technique is called future pacing. It’s very powerful.
Day 7: Review the past 7 days
Feel the grief. Don’t dodge it.
Then, work out where this can lead you.
As Ovid, the philosopher said: “One day this pain will be useful to you”.

Even if you haven’t started trading yet, it’s essential that you start to work on your mind. When traders begin in the markets they often think success will come easily to them. They ask “How hard can this be?” They under-estimate the importance of the task at hand. Don’t make this mistake. Be prepared for all eventualities by educating yourself, developing your mind and cultivating success habits.

Louise Bedford is a full-time private trader and author of The Secret of Writing Options, The Secret of Candlestick Charting, Charting Secrets, Trading Secrets and Let The Trade Wins Flow.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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