In Trading, Loss is the Rite of Passage to Wealth

For the past 16 years I've had the opportunity to meet and coach all varieties of traders in various markets and situations. With 85%-90% of the trading population being of the male gender, some very clear and distinct patterns emerged. From that I created a plan that will help traders trade unemotionally. Please note that females do experience some of the same problems but this article is primarily geared to men, because they are just different.

Why? Men have been socially conditioned to keep themselves under pressure to succeed. Family and society guide them toward the respected professions of doctors and attorneys, which demand perfection. During the childhood to young adult years, schooling and sports constantly reinforce the necessity of being the best, and this quickly becomes the mantra for most men. Their environment further reinforces achieving, being right, not accepting loss and always winning.

When trading is chosen as a career many are unaware that they will be faced with conflicts from this social conditioning. Beliefs, behaviors, experiences and hidden sub-conscious triggers that are programmed into the body's "auto-pilot" mode now surface unexpectedly making a direct attack on the ego. Some traders, work through this over time but many don't survive, and just add to the dropout statistics. Non-mastery of emotions is the major reason so many will fail in the trading business. This article explains the WHY, and more importantly, the possible solutions. There are challenges that every trader faces before they achieve mastery:

Realizing That Loss is the Rite of Passage to Wealth

Most new traders are ill prepared for the emotional hit the ego takes when they first experience trading losses. Few professions come with the inherent unavoidable challenge and possibility of losing, each day. I doubt there is any one trader that has succeeded, lasted in the business and is profitable that doesn't have a "war story" of losses. In fact, many will tell you of enormously large losses. Should they be able to overcome this hurdle and stick it out, they have a great chance at prosperity. Loss becomes the right of passage, to wealth. No other profession demands the constant day to day management of losses. Many who fall pray to the emotional impact of losses, experience blows to the ego, low self esteem, insecurity and many times paralyzing fears.

Overcoming Patterns of Behavior

We all have built within us, an innate addiction to patterns. Patterns are all around us. In all forms of nature, right down to cellular structure, even within the markets we trade.

Our bodies have a passion for patterns and install them whether we want them or not. Patterns provide us with the emotional benefits of security, certainty, stability and the bottom line is they make us feel good. The problem is our internal unconscious desire for patterns, has a small "glitch.” It doesn’t discriminate between good and bad patterns.  

Here's how it works, think of your favorite restaurant and the last time you went. You were handed the menu. You asked for the specials, but you ordered the same thing you did on your last visit! Patterns! Think of the way you drive home, choose your favorite shirt, pants, drink or seat in the theater.

Well patterns are great for our normal lives but for trading they can be a problem. When we trade and begin to lose over and over our bodies "lock in" to the pattern and it says: "Whoopee I feel good - a pattern, I can do this again." It doesn't care you have lost money or even that you have lost 3-4 times in a row. It just loves the pattern and locks onto it.

I can't tell you how many times I hear traders say "I can't take a winning trade, the last four I have lost, doing the same thing." I reply: "Do you know specifically what you did wrong?"

They say: "Sure" and my standard reply is, "Then stop doing that."

They say, with all the intelligence they have, "I can't." Why? Because their body craves the pattern. So even if though their mind knows it’s wrong, they will do it yet again.

This is the premise detectives go on when catching criminals. They work to identify criminal patterns because they know eventually they will repeat them again and again.

Overcome the Intense Emotions Triggered by Trading

Let me be the first women to go on record, and testify, that men do have emotions and if there is any profession that will reveal this completely it's trading. Trading of any kind will bring out the emotions in the best of traders until they become the masters. The primary reason is that they are in conflict with their social conditioning. They have to win. When the ego is shattered from losing trades, its confidence is shattered.  

Solutions to the Three Trading Challenges

Those were three trading challenges and now lets look at the possible solutions.

1. Manage and learn to accept loses. The reality is, traders lose. It's part of the game. The way to manage this is to develop specific rules for how much you are willing to lose and then establish good money management habits and disciplines. You’ve probably heard old saying: "Minimize the loses and maximize the profits."

Try an NLP (Neuro-linguistic) approach and re-frame (change) your thinking or definition of loss. Write down all the things that you can think of that are related to: "Why losing is a good thing." Then, re-read your list each day. This will send some new messages to the brain and will reduce the emotional impact.

Develop a strategy and rules for "recovery" to regroup quickly. Set parameters for the amount you are willing to lose within a day or week. Stop trading when things are not going right. Set your stop loss dollars to something you can easily let go of. Most importantly, review and find a solutions to your losing trades.

2. Become aware of good and bad behavioral patterns. Since we now know patterns will be there if we want them or not, it's important to identify those that are bad for our trading.

There is a simple (3) step approach to turning a streak of bad trades around.

First, know yourself well enough to say: "Oops, I'm in a bad trading pattern." Do the three strikes your out technique. If you repeat a losing trade three times in a row, make it a rule to stop, and change the approach before you place the next trade. Don't repeat it for the fourth time.

Second, ask the question: "What is the pattern I'm in? What other approaches can I take on the next trade to be profitable?" Come up with some other changes.

Third, reduce your trading size and try out new approaches till you find the one that works and you become stabilized.

3. Eliminate emotional trading. The key is to learn to trade unemotionally and become the master over yourself. As soon as you go into any emotion, you will run the risk of cloudy judgment, in all aspects of the trade. One way to center your thinking and move from emotion to intelligence is to ask a question. A good question to ask yourself when you are in a trade is, "What's REALLY happening?" This will keep your mind focused on the trading reality. If all is going against you, your technicals are off, and the Dow and S&P are crashing...and you're long at the same time -- you have to make a decision and realize it's not working. Change your approach. Great traders don't get hang on to their ego and need to be "right.” They are focused on minimizing their losses and are flexible enough to patiently wait for their next opportunity.

Remember: Trade from your intellect not your emotions, and there is always another trade around the corner.

Should you need additional assistance get help, don't think some of these emotional triggers will go away on their own … many need a bit of help. My goal is to pass on those techniques. To all, great trading!

Robin Dayne, known to many as "The Trader's Coach" is a trader herself, and has spent the past 12 years studying the emotional and psychological aspects of trading. Robin has appeared on CNBC, 20/20 News, the CBOT and CME training site, BusinessWeek and TheStreet.com . She also hosted one of the highest rated online radio shows "Elite Masters of Trading". For more information about her unique coaching services, you can email Robin at info@robindayne.com or go to www.RobinDayne.com.