One of the key psychological issues that arise in traders is accepting a loss. We are conditioned to strive to be “winners.” From the sports we play to the careers we choose, an attitude favoring achievement is carried with us.
In fact, having our ego tied to our achievements is a natural by-product of our society. The question is must we accept losses?
Every trade we enter has the possibility of losing. We determine that the risk is worthwhile if the potential reward is great enough and conditions favor a winning trade. We look for evidence that the trade is a high-probability trade and with confidence, we take our position.
Here, at Options Animal, we learn how to adjust our trades to protect our capital and minimize losses. The most critical element of portfolio management that we learn is to plan for primary and secondary exits. It is those secondary exits that are so critical to facing loss without fear. Those who complete the educational program have all the tools needed to modify their trade as markets change. We have roadmaps and flowcharts that tell us to do “x” if “y” happens. These are useful in planning our secondary exits. As professional traders, however, we realize that adjusting to a secondary exit is only done when the primary exit is no longer achievable. Our subsequent goal becomes one of minimizing our loss or closing the position at break-even. And, the sooner we accomplish this, the better, so that our capital is free for the next high-probability opportunity.
What happens to our confidence level when several trades in a row don’t reach primary exit points? How we handle the emotions of a trading slump is what will separate us as “winners.” It isn’t a question of IF we experience a trading slump, it’s a question of WHEN we experience a trading slump.
Here are some suggestions by some of the trading psychology gurus:
- Engage your mind in something completely different for a week such as traveling, playing a musical instrument, doing something artistic, or learning a new skill. The new mental stimulation has a way of switching mental gears so your subconscious mind can begin to repair itself. (Notice that we seek mental repair. A healthy emotional bank account is critical to our success. Seek to restore self-confidence before you resume trading.)
- Use exercise and a proper diet to jump-start yourself.
- Keep an active trading diary, which can help your mind reach logical conclusions about why you’re in a slump. You can review your diary to reinforce the lessons you learn.
- Always review your trades to spot weaknesses that are caused by deficient trading technique, misunderstanding the strategy, improper application of the strategy, or emotional issues that are causing losses. (Most very successful traders claim to have learned more from their trading mistakes than successes. We miss a valuable personal growth opportunity if we don’t take the time to study our losses.)
Since losses are a natural part of this trading game, it is important that we learn well to minimize the losses and learn from them. Don’t allow your attitude to become “negative.” A negative mind-set is poison to the professional trader. When asked how one drops negativity, E. Tolle answers in The Power of Now: A Guide to Spiritual Enlightenment, “By dropping it. How do you drop a piece of hot coal that you are holding in your hand? How do you drop some heavy and useless baggage that you are carrying? By recognizing that you don’t want to suffer the pain or carry the burden anymore and letting go of it.”