Be A Great Loser?
What the heck does it mean to become a great loser you may be asking? Recognizing at all times when it’s time to throw in the towel as the edge no longer is present. Taking a loss is one of those things that sounds simple in theory but it can be extremely difficult to implement. That’s why the right position sizing and risk management is paramount. It helps us to protect our account and not run into far bigger problems.
The more you gain conviction that the trades we take do carry an edge that plays out overtime, the more you’ll see losses as just part of our day to day operational cost of running a business to find out if an outcome is converted into revenue or becomes the necessary expense that must be incurred in order to achieve the expected edge over a long series of trades.
The unpredictability of one single outcome, if combined with low confidence, tends to be a Molotov cocktail that can result on the progressive removal of your commitment to a particular style of trading. Luckily, in my mentor room, through my own trades and constant feedback, I’ll help u doge that risk thru the consistency that the setups provide when applying the right rules in not only the entry trigger, but most importantly, trade/risk management.
First, I want to remind you of the #1 principle to keep in mind ahead of any given trade. As developing traders, you do enter a trade that looks to exploit an asymmetrical reward to risk opportunity. That’s gets us off to the right start, doesn’t it?
If I were to tell you that for every flip of a coin you get paid minimum $100 if heads and taken away $50 if tails, you’d be playing the game all day long! So, if you accept that as true, the only reason traders struggle to take losses and impacts their psyche is because of psychological reasons and our social environment that ingrains within us certain ideas about right and wrong. You need to progressively flip these ideas on its head.
If you seek constant security and do the right thing, you will inevitably find it tremendously hard get past the negative emotions of taking a loss. This is very rooted within the human brain. From an early age, we have been taught to do the right thing, and avoid doing the wrong thing. So no wonder we associate a loss with a negative outcome that triggers within us do whatever it takes to avoid being proved wrong in the market.
Now, if your position size is far too big, that feeling of false hope for the market to turn around gets only amplified. Why? Cause you can’t accept taking such a big loss. It’s far better to remain positive and optimistic and hope that a losing position turns around, isn’t it? Again, is completely counterproductive to our chances of success. It’s simply statistics that if you lose too big on your losers and win proportionally smaller the equity curve won’t look pretty.
We can also touch on the biological reasons as to why it’s difficult for us to to take a loss. We are by nature loss averse. This has been studied and validated by behavioral psychologists. Prospect theory has shown that people generally make decisions based on their potential perception of losses and gains rather than rational probabilities. The tendency to avoid losses compared to realizing gains is a very well researched and proven truth on how human behave. The pain of a loss is many times more impactful than the joy of a gain. I could go on and on with further shortcomings traders face such as close-minded, attachment to trades…
Let’s Focus On Solutions
Now, how to break through? It’s a process that takes awareness, developing a neutral mind, remain unbiased and objective based on market information. One of the best weapons I have come to learn over the years is the power of meditation as a vehicle that has helped me to rewire my brain to address limitations, aim for success, build emotional IQ, enhance a present mind, develop pattern recognition skills, retention of memory, and other elements all essentials for trading success.
A major challenge of mine before meditation (back in 2014) used to be the activation of my fight or flight response to certain tense situations. I knew as an aspiring professional trader my attitude should be to stay calm, relaxed but it was easier said than done. The more I’ve meditated by just spending 10m/day, the more I’ve contributed for my brain to also stay in a state of internal peace and happiness, while I feel more in charge of my emotions and dialogue.
I also felt that has translated in my determination to make tough decisions in life in general. The practice I’ve performed over many years is called Shamatha, I tend to do it right before trading for 10m, as a practice aimed to strengthen the mind’s stability and to counterbalance the symptoms of an agitated mind. Shamatha meditation—mindfulness or concentration—is the foundation of Buddhist practice. My mentor on this field has been Chris Capre of 2ndSkies.
You can find out more about what Shamatha is about via this video below: