Why do you trade? Is it for the profits? Do you need to win? Many novice traders have difficulty achieving the ideal, objective and rational mindset. They may take trading losses, and subsequent drawdowns, personally. They see these setbacks as a hit to their ego, attaching personal significance and symbolic meaning to just an everyday fact of trading. Losses should be expected, and it's vital that you don't take them personally.
Certainty, it's natural for a person to feel upset and disappointed upon experiencing a severe drawdown. Financially, a great deal of money has been lost, and even if one were to return to profitability after a drawdown, from a purely mathematically standpoint, it will take some time to build one's trading capital back up. It's reasonable to feel a little disappointed, but it isn't useful to take it extremely personally, or let it impact your self-worth.
How does one control emotions and stay objective? It’s useful to remind yourself that many factors associated with profitability are not about you. A large part of trading profitably requires using a trading strategy that is capable of producing a profit. Sometimes it takes ingenuity to find such a strategy, but many times it is a serendipitous event. And there are those times when it's a matter of learning about a profitable approach from others. But in the end, it's just a matter of odds. It's just like rolling a die or flipping a coin (in some ways). One expects to make a profit over a large number of trades, but in the short term, even a winning strategy is bound to have a string of losers. That's just the nature of probability theory. A small number of flips is less than an infinite number, so it's quite likely to get a string of a 50 heads out of 50 tosses. So why make it so personal? Why put your ego on the line with each trade? Why gloat when you are lucky enough to have the odds work in your favor and sulk when the odds go against you?
When it comes to trading, you've got to unlearn what you've learned your whole life. It isn't all about you; it may just be the odds working against you. In other fields, probability plays little if any role. You put in effort, make sure you meet the expectations of the folks who pay you, and you're a success. In the traditional work environment, it makes sense to put a little ego and pride into your work. Your effort and talent often have a direct payoff. But with trading, the odds can still go against you, no matter how much work you put in. You need to consider that "success" can sometimes (but not completely) be a matter of odds. That's hard to accept for most people because it means that when you are a winning trader, to some extent, it may be a matter of the odds randomly working in your favor. That takes some of the glory out of it, doesn't it? But on the other hand, it helps you cope with a severe drawdown. If you are a skilled trader who really has mastered the markets, you can feel assured that, if you are trading at peak performance, the odds will soon move back in your favor, and you will again see consistent profits. Taking a detached, unemotional approach may take some of the glory out of trading, but on the other hand, it will help you stay unemotional, take precautions, such as careful risk management, and stay focused on the process of reading the markets, implementing winning trading strategies, and trading profitably.
The Problem
Many traders take setbacks personally and think it is a reflection of their self-worth. They put pressure on themselves to succeed and tend to choke under the psychological pressure. It’s vital to cultivate the proper, objective mental edge, however.
Mental Edge Strategies
First, use reliable strategies that have a high probability of success. Second, minimize risk so that you can more easily convince yourself to take it easy. (Don’t trade with scared money, and make sure that you can easily live with the worst case scenario.) Third, think in probabilities: Remind yourself that your strategy is reliable and that over a large number of trades, you will profit overall. Fourth, don’t put your self-esteem on the line with your money: Your net financial worth has no bearing on your self-worth. No matter what happens, you have value as a person.
There’s no need to let losses and setbacks interfere with your sense of well being. Stay detached, focused, and logical. The proper mental edge will increase your odds of financial success.
By Michael S. Shopshire, PhD, Mental Edge
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