Tennis players have it, golfers have it. Even pick up artists have it. I’m talking of inner game. In trading, that means the ability to handle losing money.
It’s something we all need to develop if we're to become elite CFD or FX traders.
In this article, I’m going to talk a little about how to handle losing money, and not go to pieces as a result.
But first some self-reflection.
Are you the type who hates being wrong?
Do you flip out at other drivers on the road over the slightest infraction?
Are you a mover and shaker in the world, and have succeeded by imposing the strength of your will on your environment?
If you answer yes to any of the above, then prepare for some epic struggles in the arena known as trading.
As a kid I was taught participating in the game was more important than winning the game.
I’m not sure of the merits in that belief system. From a Darwinian standpoint, evolution does seem to favour the winners.
But, from a trading perspective, the ability to handle losses with equanimity is a plus. And a big one at that.
As a kid, I was always a graceful loser. Just as well, I wasn’t good at very much.
My best mate was the opposite.
As youngsters, we’d play footie in the garden, and he’d hate it if I beat him (which was rare).
When we played the big kids, we’d get slaughtered, and he’d go off ‘all in a huff’.
I was always balanced in comparison.
I took my losses easily, a Taoist trait probably instilled from my mum.
He was a 'winner' and frankly I was a bit of 'loser'
Little did I know at the time that being so great in defeat would prepare me for a profitable career as a trader.
I mean how many other jobs require losing as part of a winning strategy?
Losing gracefully isn’t your typical alpha or captain of industry type of trait.
And the love of losing isn't handled at all well by most intellectual types either – just look at the UK after the EU referendum to see that.
All three personality types struggle in the market.
Try imposing your will on the S&P500 futures and see how you fare.
I once suffered 50 losing trades in a row.
I’m sure the alphas, captains of industry or intellectuals couldn't handle such a monumental feat, because their so used to getting their own way.
Losing your cool
When you lose your calm in trading, it leads to revenge trading. You’ve lost any inner game you may have had.
Your trading goes to shit.
The last thing you want is to conduct yourself like John Mcenroe in the video below.
You simply cannot argue with Mr Market. Or yourself for that matter.
Losing emotional control is your biggest enemy – much worse than losing even a string trades.
When you lose control, you become mindless - and mindless leads to stupid trading.
It leads to taking trades you shouldn’t. You double up. You don’t use protective stops.
Or, you blame your system and go in search of holy grails.
You need to prepare for these times in advance.
The journaling solution
You could try journaling. Just about every beginning trader needs to keep a trading journal.
They should. But they don’t.
The last thing a beginner wants is to be reminded of what a loser he or she is.
For me, I only kept a journal, when trades went well. The minute trading went south so did my journaling.
You should keep a solid track record of all your trades as you can here. It's called a good accounting practice. Trading is a business after all.
But if you think it's going to solve all your hang-ups around money you're sadly mistaken.
Staring at your rapidly diminishing P&L only reinforces bad trading habits and doesn't introduce good ones.
I live in a Buddhist country, so I'm well aware of the merits of meditation. Not that you need to be Buddhist to meditate. Even CEOs are at it these days.
Russell Simmons, the founder of Def Jam, and once manager of some of the best rap artists ever, has been an advocate of meditation for years. He's not your stereotypical meditator but claims it's made him into the successful mogul he is today.
So if you're put off meditation think again. It's probably the most practical thing you could ever do.
That said, it's not going to rebalance left and right hemispheres of your brain overnight.
You may want to try listening to Binaural beats for that. They're proven to work and work quicker than sitting in a lotus position chanting the Pali canon.
If you start thinking I'm going all weird and esoteric on you, I believe there's a valid and very earthly reason why you should try to shift your mindset to one of abundance.
Many of us have a pitiful relationship with money. Meaning we believe there's a constant lack of it in our lives.
After all, why do most of us want to trade, if not to earn more cash?
The whole thesis of economics is built upon competing for a lack of resources, as is much of politics. Is it any reason we think the way we do?
On a more personal level, we know that money doesn't grow on trees, that we have to work hard for it, and there's never enough.
But shifting your mindset 180 does an amazing thing for trading results.
You stop panicking over losses, you're not so greedy, you become more patient because the universe has your back.
Whether the universe really does have our backs or not I'm not sure, but this mindset sure helps with your bottom line.
Like meditation, behavioural change doesn't happen overnight, but there is a slow shift in perception if you make the effort to change your beliefs.
Practical solution (if you have a mechanical system)
Meditation, or changing your internal dialogue is not for everyone.
Some are so rooted in the world out there, no amount of persuading them otherwise will do.
That's fine, I have a solution for you too.
As a trader, you need positive reinforcement. We need a quiet constant reminder of the direction we are headed.
That's usually the job of a mentor or coach, but precious few of us are lucky enough to have them.
So the first level of order is to put your trading rules on the wall in front of you.
If you haven’t yet got a set of trading rules then it's wise you get some fast.
The second level of order involves setting some time aside and spending it going over your charts.
Start taking screenshots of all those times your chosen strategy worked, choose the best times - the ones when the results really impressed.
It doesn’t even matter whether you ever made those trades yourself.
Just find examples of when it worked is enough.
Many of us are visual learners, and it's more practical for us to see what worked and how, rather than simply reciting trading rules each day.
Reading trading rules doesn't affect deep psychological change.
But being confronted with a bunch of winning screenshots of your trades each day can.
Get creative, annotate your charts. Resize them as full-size posters, make those trades as real as possible in your own mind.
The probabilities mindset
The true secret of trading is to develop the probability mindset.
Everything else follows from that.
All your trading practices should have the creation of a probability mindset as the end goal.
Completing the above exercise, and putting the resulting charts on the wall, will be a start. It will remind you of the success awaiting.
It will also put losing trades into perspective.
It's not a big deal taking a 1R loss if you know your best trades earn 10R. You've got it right in front of you as proof.
Losing money is always going to hurt. I still say a few F words after them. But I've developed the mindset enough to know that a string of good trades is around the corner.
Strategies are a dime a dozen. If none on this blog take your fancy, there are many more out there.
But handling losses with equanimity is what separates the good traders from the bad ones. It's really the only difference.
So this weekend get some screenshots of your strategy performing at its best, on your wall. You'll have taken one small step to your future trading success.