One of the greatest problems we face as traders are the one we rarely ever talk about: our emotional responses to loss. I think it is extremely normal and natural for us to not want to discuss loss.
The loss is something that we learn about at a young age and as we develop and grow into adults. So certain unconscious and subconscious reactions that began at development are just a part of us.
We don’t even realize that when we are in a situation where our mind even perceives a crisis that might involve the pain of loss, it reacts.
We’re unwitting slaves to it. And that is irony as traders: one of our greatest defense mechanisms is our greatest enemy.
If you have had therapy before, you know what I am talking about. Also, if you’ve ever had therapy before and learned about yourself, you are light years ahead of your peers as far as the health of your trading goes. In this sense, you are better equipped of how to deal with a loss.
I say that because when we bring up the discussion of ‘feelings’ people tend to mock it or ignore it or walk away from it. As traders though, that is so very, very dangerous.
It is important to know how yourself. It’s important to know your insecurities, your fears, your feelings, your anxieties, your thoughts and perception of self. You need to know you. You can have an IQ of a million but if your emotional IQ is 20, you will always fail.1 You need to know you.
How to deal with a loss- is that what you thought, too?
It’s easy to say to yourself, “I know how I react when I have a losing position” or “I know I was upset, when I should have just taken the loss and not moved my stop” or “I know I was frustrated when I took profit early and then watch price move more and I tried to chase it only to get stopped out again.”
Recognize, recognize, recognize
Recognizing your reactions is the easy part. The hard part is recognizing the part between the triggering event and your reaction. And that is where your thoughts and feelings come into play.
If you think about it, trading is not normal.
It’s the antithesis of normal.
Your brain certainly thinks that way. To become successful as a trader, you must put yourself into situations that will bring pain, suffering, and loss1. And that is the normal part of your job as a trader. You are actively competing against the most powerful forces in your body: the unconscious and subconscious. You are quite literally fighting yourself and most of the time, the end result is a failed trader. You get beat by you. You even did not have the chance to learn how to deal with a loss!
So how do you stop this invisible force that seeks to protect you at the expense of financial disaster?
And that is important to know. In fact, you don’t want to stop that kind of reaction! Knowing you have no control over something is often times a relief. This is similar to Step 1 of Alcoholics Anonymous, “We admit to having no control over our unconscious and subconscious reactions.”
When you admit that you are not in control of years of internal defense mechanisms, it stops becoming a Demon in you, and more like a really scary monster. Still freaky, but at least it’s not a demon.
How to learn to deal with a loss- learn to be aware
So if can’t we defeat ourselves or those defense mechanisms, what do we do? You learn to be aware.
Sometimes, just being aware of what we are thinking and the feeling is enough to stop our reactions from hurting our trading. This is difficult for people to do, to be aware.
Again, I am not just saying that you give a voice to your thoughts and emotions by saying, “I feel scared. Ok, I know that now.” That is not enough.
What you have to do is something a little uncomfortable, but once you do it and let it happen, you almost feel like you got a new super power.
The skill you use is like trading: It’s not normal. You approach it like trading: The opposite of normal. You are going to have to let yourself feel those thoughts, feelings, and emotions. And you know what?
Not just let yourself feel them, let them wash over you, let yourself realize the extent to which you have unknowingly developed such powerful and effective ways to cope, avoid and handle the pain of loss.
This is not an easy thing to do, it’s not a comfortable thing to do and some of you are probably disregarding this learning tool.
How to deal with a loss- Scenario 1
Let’s take a scenario that all traders are familiar with and maybe it’s happening to you right now. You spent some times analyzing a chart, a lot of time. You’ve been diligent and looking at the monthly, weekly, daily and now you’re looking at the hourly.
You already assessed where the historical points of resistance and support are. You’ve determined that the best course is too long, you’re just waiting for the setup. Some time goes by and finally, your set up! You take the long. And you watch it. You keep watching it…
As you’re watching, you are getting restless. Biting finger nails? Are knees shaking up and down? Drink a crap ton more coffee? Get up and pace thinking if you don’t look at it everything will be awesome when you sit back down?
You go back to your screen and the total opposite happens of what you determined had the best probability of happening. Now, that’s right when you need to stop what you are doing and let those feelings take over.
Let them take over, but don’t you react.
Getting out of that trade before your stop or profit target is hit is just a way for you to get rid of the feelings you are having right now.
Don’t give them control, give those feelings an open space. When you let it happen, it’s something to be afraid of.
Things you should do, courtesy of the mindfulness teaching all over the world (things that are actually important when dealing with a loss):
- Take a couple of minutes to notice your breathing. Since the flow of the breath, the rise, and fall of your belly. Diaphragm
- Notice what you are doing as you are doing it and tune into your senses. When you are eating, notice the color, texture, and taste of the food.
- Don’t feel that you need to fill up all your time with doing. Take some time to simply be. When your mind wanders to thinking, gently bring it back to your breath.
- Recognize that thoughts are simply thoughts; you don’t need to believe them or react to them.
- Notice where you tend to zone out (e.g., driving, emailing or texting, web surfing, feeding the dog, doing dishes, brushing teeth, etc.). Practice bringing more awareness to that activity.
- Notice how your thoughts are probably judging you. Take notice of how much you probably beat yourself up with just thoughts.
Something you will notice as you learn to let yourself experience your own thoughts, feelings, and emotions is that you will be able to notice them earlier and earlier, to a point where you might be able to catch yourself knowing that you are going to react to something, knowing full well you can’t stop it.
It’s kind of an awesome and amazing thing when it happens. Knowing you’re not in control of things in your own head is weird and cool.
Our money or why is it so difficult to deal with a loss
Now there are other ways we as traders can mitigate strong emotional reactions to loss or crisis. Because it’s our money, and money is pretty much necessary, it’s difficult to make money trading without having a freak out every once in a while.
But if you are constantly and consistently panicking about your account, you need to stop yourself from continuing that behavior.
Some things you can do right away are:
- reduce the size you put on the table
- use a longer time frame
- take a break.
Really, taking a break is essential. I feel like a lot of us who are traders treat it like a video game.
What does dealing with a loss and World of Warcraft have in common?
Any of you play World of Warcraft when it came out? I did. I don’t remember the first two years of that game. Trading is very similar to that. Many could do it all day and night.
If you don’t have a regular sleep schedule, start. And you should be exercising. Not kidding. It’s amazing how much better I know I feel after a good work out. It’s essential for your physical just as it is for your emotional health as well.
And get a standing desk! I use one and I love it. For even more details on my daily routine and how I fight overtrading, check this ARTICLE.
Diet, Sports and Dealing With a Loss
Along with exercise is eating right. I am always amazed at how much crap we put into our bodies as traders and as people in general.
Trading is such a brain intense activity that sugar alone is not going to help, caffeine is not going to help. What you need is a healthy diet that keeps your gut happy and your brain healthy.
For those of you who have transitioned from a bad diet to a healthy diet, you know what I mean when I say you really do feel much better.
Getting more personal…
And I want to throw in a personal anecdote here regarding diet and exercise. I used to just sit around and game, I was a skinny fat weak person (huge gut, skinny arms and legs). I loved to eat. I still loved to eat. I hate running, have always hated running.
My brother got me into long-distance running and you know what? Running is fun AND you can eat whatever you want. Seriously, I have never eaten so much in my life as I have since I started running about 5 years ago.
I don’t know of many other activites where I you can eat steak, cake, drink whole milk, and actually lose weight at the same time.
Running and trading
Also, regarding running, I think it translates to trading very well. In trading, we fail all the time, it’s just part of the process.
We fail, we learn, we get better.
Each failure makes us better (well, unless you don’t learn from it!). Running is the same way.
You hit a certain speed you can’t reach, you start lower and work your way back to until you can beat it.
It might take a while, but eventually you can beat it.
Trading is the same way in many respects.
How to deal with a loss- Talk to someone
Another essential thing is you must talk to someone. This is an entirely too difficult journey to be taken on your own.
Find a pastor, your spouse, a therapist a close friend, another trader. But find someone who will listen to your frustrations in the market.
They don’t even have to know what you are talking about! But you would be amazed at what you can solve when you verbally sound it out. And you will feel much better.
Journaling- another amazing activity that helped me deal with a loss
Journaling is something I know I struggle with doing diligently. But journaling was one of the things that changed my performance in the market.
It changes my performance because I was able to actually see how often I did things that messed upmy otherwise successful plan.
My journaling taught me how unsure of my own analysis I was! And that even if I spent considerable hours before the trading week to plan and I knew what I was going to do, within minutes of something looking like it was going against me I would bail out.
So journaling helped me see me how often I did that; how often I screwed things up on my own.
Summing It Up
- Accept that you can not change a lifetime of unconscious defenses towards situations of pain and loss.
- Allow yourself to experience your own thoughts, feelings, mood, and emotions. Don’t try to change them, just experience them.
- Reduce your trading commitment, avoid putting a full position on, ease back into it.
- Take a break! Take a vacation! Trading is a career, it’s not your life!
- Find someone to talk to about your trading day and your successes and your failures.
- Exercise! Exercise! Exercise!
- Journal, journal, journal.
In closing, I do wish you all the best. Trading is a very difficult and lonely career and that solitude makes it even harder to cope with at times. So make sure you take care of yourselves first before anything else!
Check out some of my other popular articles:
Learn How to Use Candlestick Charts (Free E-Book included)
Learn Proper Money Management Skills (Free Risk Calculator included)
and of course, e-mail me at: email@example.com if you want to learn more about how I deal with a loss!