The Psychology of Trading Losses

In Blog by Michael Arnold

Guy looking at computer screenWith all the market turmoil the last few weeks, an old article in psychology today made its way to the top of my desk this week. Written by Guy Winch (Ph.D.) titled “The 5 Psychological Challenges of Loss and Grief – How loss disrupts our lives and how to heal”, Dr. Winch is writing about loss of loved ones, but he could just as easily be writing about trading losses. He expands upon 5 key points:

  1. Overcoming Paralyzing Emotional Pain
  2. Adjusting to Changes in Our Daily Lives
  3. Reformulating Our Identities
  4. Reconstructing Our Relationships
  5. Adjusting Our Belief Systems

All of these apply to trading losses as well. In our daily lives, we accept loss as a part of life. Whether loss of a loved one or a beloved pet, we walk around know, consciously or unconsciously that we will experience loss. New and novice trades, however, almost never accept loss as part of the equation in trading. They enter into it thinking, they can find a formula that wins all the time, and if there’s a loss, they try to make adjustments to eliminate the losses as opposed to developing techniques to control them and emotional coping mechanisms to losses. The slightly adjusted traders list would look like this:

  1. Overcoming Paralyzing Emotional Fear of Loss
  2. Adjusting to Changes in Market Conditions
  3. Maintaining Our Trading Identities
  4. Reconstructing Our Money at Risk
  5. Adjusting Our Belief Systems

Some of these are obvious, but we will expand upon numbers 3 and 5.

Maintaining Our Trading Identities

When losses happen, one of the most common and worst things that traders do is analyze the losing trades. This may sound like a strange statement, but traders who work to eliminate only losses end up eliminating more winning trades than losing trades. You must review and analyze ALL your trades after the fact. Don’t assume that your winners were executed correctly simply because they made money. If you employ a time-tested, high-probability trading strategy then you must maintain your trading identify after losses, the same as you do after wins and this should include reviewing all trades for errors, not just losing trades.

Adjusting Our Belief Systems

You must understand that you will have losses if you’ve decided to become a trader. One of the great things about binary trading at Nadex is that it gets you accustomed to this while protected you from the unexpectedly large losses, which are the kind of losses that affect people in their daily lives the most, just as they affect traders’ minds and emotions the most . Learning that the ideas is to control and contain losses rather than eliminate them, is the belief system that you must adopt if you want to be a trader. Know that they are coming. Recognize your emotions, but control your actions and you will be on the correct path.

Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results