Thursday, August 25, 2005

Learning to lose

Hi Folks, I found this article on a forum today and liked it so much i asked to reproduce it here. I think this may change a slight paradigm in your thought processes when you get to the end :)

Learning how to loose is one of the most powerful skills that a trader can possess.

“Ah! Yes I know what you mean…every losing trade takes you closer to the next winning trade” Well…this is one of those sayings that seem to have an ‘air of wisdom’ about them and like I said in the heading, “trading sayings are dangerous”

Traders suffer an 80/90% failure rate, that is they start trading, learn a bit about technical analysis and then set about trying to devise a way to avoid losing, in an attempt to make money.
Some of them master this completely, by becoming so paranoid that they don’t place any trades at all, or just miss endless trading opportunities.

Making losing trades is vital to your success as a trader, without them you simply cannot advance at all.

So, how do you approach the task of making consistent controlled losing trades?

The first part is acceptance. Successful traders have accepted at a subconscious level that losing is on exactly the same scale as wining. Once this shift has taken place within the trader it will have a profound impact upon your trading results. It will set you completely free from any emotional attachment to that trade.

Side note:
Most traders try to detach themselves by endless strategy development, via the change or trimming of ‘perceived’ trading indicators. This is at best a waste of time if the subconscious is not involved in the process
.


So how does a trader persuade the subconscious to accept this completely alien concept?
Well first we need to understand a little of what is going on in this truly amazing part of us located between our ears called the subconscious.

One role of the subconscious is the fight or flight response, that is; do you stand and fight or do you take flight?

This fight or flight response is a survival mechanism that kicks in EVERY time you are in a ‘threatening’ situation.
For the trader this is where 90% of the problems lie, because if any aspect of your trading causes even the most minute reaction, to the automatic fight or flight response, the chemical reactions start to kick in and you are lost in a sea of indecision and fear.

Think of it like this; imagine jumping out an aircraft with a lump of silk attached to your back for the very first time, then fast-forward to jump number 1,000

On jump 1,000 you would have having a wonderful time, maybe even a few tricks on the way down.
The point I am trying to make here is that when the situation you are in, is a know quantity, for example you are ‘comfortable’ with the outcome, then and only then are you free to experience fully the moment you are in, or the action you are carrying out.

The difference between making 1,000 parachute jumps and taking 1,000 trades, is crucial to understand, the difference is one of constants, when jumping there will always be a set of constants. With trading EVERY trade outcome will always be a variable.
This means than unless you persuade your subconscious that these variables are completely NON threatening, you will always be disadvantaged as a trader because of the chemical reaction of the fight or flight response.

There are two ways in which the trader can take positive actions to remove this ‘threatening’ concept form his/her trading. Today I will deal with just one, as the other way warrants a complete and detailed explanation in its own right for which we do not have the room here.

Removing all threatening aspects from your trading.

The trader needs to devise a plan, not to win trades, but how to lose trades trade in a controlled manner. The losing should take place in a systematic and repeatable method for every trade.

Now before you think I have gone barking mad here, I want you to really think about the trades you have taken to date.
I want you to be totally honest with the answer to the question. “Did you KNOW for certain that any one of the trades you took was going to produce a profit?”
If you answer yes to this question then I know already you are not a very successful trader. Because there is not a successful trader in the world that KNOWS his/her trades are going to be profitable. Your ego may like to think you knew but the fact is you did not.

A consistently profitable trader is a trader that treats every trade the same at a subconscious level, that is, the trading opportunity just holds an equal possibility of loss or gain; nothing more than this.

The successful trader is NOT looking for winning trades, because they don’t exist, (they only exist historically) the successful trader is looking for opportunities to put his trading plan into action.


So in summary then.

1.
Devise a plan how to lose trades in a controlled and consistent manner.
2.
Ensure that you can live with this plan in terms of draw down and any other relevant aspects of the plan
3.
Now in your imagination play this plan out to see how it feels.
4.
Now play this plan out over your next 15 trades as if they are all losing trades
5.
Continuously monitor how you feel about stage 4
6.When you can role play this forward as in stage 4 without the detection of the slightest emotion or desire to ‘tweak’ any part of your plan you will have the basis of a great plan.
7.
Understand that the use of your imagination is your most powerful asset in convincing the subconscious that you are in a NON-threatening situation.
8.
Role-play this in your mind every day, preferably on the morning of the trading day and ensure you detect no emotion or conflicts.

Reporoduced with permission from The Learning To Trade Forums

5 comments:

illninho said...

cant disagree more Soul. Those books and articles are very often helpfull but so far from the truth. helpfull if you think about trading as any other profesional business. i think the older one gets the harderd it is to change point of view. and that point of view about markets is made in a long run of education. and this education has in 99% cases only one way of thinking. inside the box.

illninho said...

and by the way, why do you think subconciouse and imagination is so important? There is a very special reason for that, ou yes.

Soultrader said...

the most important part of the article in my opinion is the bit that says 'you arent looking for winning trades'

That's what i was reffering to as a paradigm shift in the fact you are looking for trade setups as winning trades dont exist until they are over

as for subconcious mind thingy yes, i think its got weight - imagination carries a lot of weight with me too - thats why i do my morning routine where i imagine myself winning, closing losers fast etc - the brain doesnt know the difference between a real event and an imagined one providing its made real enough.

illninho said...

how about going a bit further and forgeting about trading while "trading". I mean this is the only way to think "out of box". Trading as we know from forums, books, courses, articles etc. is about winning and loosing strategies (those on your chart and those in your mind).

illninho said...

anyway, I think its not clear what I stated above. Mwhat i mean is: trading as we know it provides a special way of thinnking about the markets. Because we think this way we have to "cheat" our mind. When we get use to this "cheating" it is very hard to change asumptions about the market in its core.