I've asked Bob Iaccino from TraderOutlook.com to come back and give us a short article on "The Psychology of Loss" as a LOT of people have recently dealt with it. Bob's written two previous articles which you can find through this link. Please enjoy the article and visit Bob's site TraderOutlook.com for more great info.
At TraderOutlook.com we spend most of our time educating our clients in our technical trading models. We give specific levels for entry, profit and stop loss and spend a much smaller amount of our time on trading psychology. Trading psychology may, however, be the most important part of the equation and the most important part of trading psychology is the psychology of loss.
You cannot enter into a career as a trader and expect to avoid losses anymore than you can enter into a boxing ring and expect not to get hit. The hits that you remember most are the ones that you don’t get up from as they are the ones that, taken cumulatively, end your career. Wait…boxing or trading? I’m speaking of both, actually. In boxing, a terrible knockout can force retirement. In trading, a terrible loss can scare you out of you next trade or worse, end your financial ability to trade.
If your trading plan is based solely upon how much you need to make per day, week or month, you have a high probability of failure. There are only 3 possible outcomes to a trade; profit, loss and breakeven and 2 of those are good. Trading can become much less stressful if you focus on defining loss and only entering into trades with an acceptable loss. When analyzing a specific trade your first input should be “what is the proper stop level” and if that level, combined with the smallest lot size you can trade exceeds you risk tolerance, then you should not analyze the trade any further. It makes no difference if the reward to risk ratio is 3 to 1 or 1000 to 1, if the risk is too high, the trade is eliminated. Having said that, if you enter into a trade where you have defined the risk and determined it to be acceptable and the result of that trade is a loss, how can this be upsetting? The answer lies within the psychology of loss.
It is human nature to have a negative emotional reaction to a loss of any sort, especially a financial loss, but when doing trade analysis, a stop loss being hit should be looked at as one of the 3 possible scenarios, not just as a protective measure. When looked at this way, you will find yourself in fewer and fewer high risk trades and the end result will be the execution of better trades. We at traderoutlook.com do high probability trades, but yet still take the potential loss as the largest input in our decision making.
Look at trading realistically, like a boxing match. Play defense as well as offense and appreciate both. Define and accept your risk and you will control the emotional damage a loss can bring. If you do this, profits will find you.
5 thoughts on “The Psychology of Loss”
100 % right,Jay.
Gidday from Down Under.
As a newbie to the exciting challenge of Forex, I have been under the close mentorship of Bob Iaccino and am impressed with his constant reminders of "acceptable risk or loss".
Coming from a military background as a veteran Infantry officer, I am certainly no stranger to calculating risk and endeavouring to ensure that any loss is minimised, ie mitigated risk. As hard as it is in that sort of scenario to accept ANY sort of loss, it must always be weighed against the eventual benefit. Granted, this example is an extreme because of the multiple implications, eg, families, etc.
So, thank goodness I can transfer these lessons and experience to a "battlefield" where any losses are measured in dollars, rather than lives - and the emotional stresses are far less. In this context I particularly like Bob's philosophy of "two out of three" is always good. We can either win, lose, or break even - and the "lose" can always be minimised by proper calculation of the risk and mental acceptance of "determined" loss.
The "devil is in the detail" - ensure the "stops" are put in - even to the extent of being ultra conservative. And when in doubt, ask, and ask again, and again.
Two out of three = 66%, and that's a good rate these days, particularly if you concentrate on minimising that remaining 33% and improve on the 33% break-evens.
Keep it Simple for Success(KISS).
Great analogy of trading akin to a boxing match. Will keep that in mind while trading.
Are there any INO members out in the New York City metro area who are successful using the trade triangles and would like to get together to exchange ideas on how to become a Consistently Profitable Trader? I would like to meet these members and share information. I trade Forex and Stocks. Please email me if interested. Thanks ... Kar
I work in NYC and trade stocks and futures. I have been reading/watching INO.COM commentary and videos for almost a year. I find Adam to be a congenial,likable character and I relate to his purely technical approach, but I have yet to subscribe to receive access to the trade triangles technology (in part b/c they never reveal the constitutive elements of the amalgam of technical indicators upon which it is based, and I'm not big on leaps of faith). The videos sure seem compelling, but I wonder how often the triangles lead investors astray (rarely mentioned). Also, in recent months I've been experimenting with more of an intraday trading model, and I'm not sure that the trade triangles would be of much value for such a timeframe. But I would be very interested to speak with you to share ideas/strategies, and am open to subscribing, particularly if I have a "buddy" to share trading success and failure experiences with. Feel free to contact me.
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