The most important problems leading to losses in the market and how to deal with them
"I suffered a series of severe losses, and to this day I still can't recover from it." - this is how an investor friend described the more difficult period he was going through. Life events made him more stressed than usual and on top of that, a series of losses happened to him.
As a result, he was unable to return to the market. He sat in front of the computer, looked at the signals being drawn and... was unable to enter a position.
During a later conversation, he took out a thick binder full of color printouts of the market.
- If I had entered today I would have made a lot of money. I analyze the last few weeks and see how much I would already have in my account. My wife laughs at me for becoming a demo investor. She has already accepted that I sit in front of the screen for hours and don't trade.
This story has a fairly neutral ending. The standard of living and the family remained intact, and the investor was left with ample capital to live a quiet life, dating back to his days as CEO.
But for many investors, the inability to return to the market is a disaster, as they have to look for another source of income.
Other stories end worse. Much worse. Investors lose assets (sometimes not their own), embezzle company money, lose their homes (a loan in the bank against collateral), fall into alcoholism and drugs, get into mental problems. Those who carry emotional problems into the family lead to breakups and suffering.
In extreme cases, symptoms of post-traumatic stress disorder appear, which can drag on for years turning life into hell. In many of the situations described, further trading can be forgotten.
The problem of losses and how to react to them is very serious, especially since there are no good sources of solutions that can stop the problem or reverse it at all.
What the best traders do differently?
To "bite" the problem a few years ago, while researching top investors, I started asking myself questions - how do they deal with losses, what methods do they use, what has allowed them to survive so long without negative side effects? Long-term and systematic profits are surely some kind of guarantee that these people can cope.
Studying the best we discovered several reasons, some of them are due to the different approach to the system and the way they trade, some are the mental work techniques they used.
According to the research, the best traders approach the system and its results quite differently.
First of all, their systems are well prepared and tested. Among other things, this is the result of many years of experience in the market. Good preparation means less stress, weaker mental reactions during the trading, greater resistance to unfavorable turn of events, belief or knowledge that despite difficulties and losses everything will end well.
Second - they perceive the purpose of the system and the outcome of a single order differently. Here they fundamentally differ from others. They know that the outcome of a single order is unknowable, so they do not get attached to it. They also know from experience that, for example, at the end of the month they will still come out ahead.
Third, the fundamental uncertainty of what the market will do makes them not risk too much, a fraction of the account, hence the high margin of safety. It will allow them to "trade back" many times over. If they risk more) sometimes a lot more) they know very well why it's worth it, they don't make decisions on the spur of the moment. The opportunities they hunt for are very good indeed.
Fourth, they know the efficiency of their system and what the maximum sequence of losses can be for them. Knowing the "worst possible variant" is reassuring, being mentally prepared we are better able to withstand a series of losses. In beginners or the unprepared, the strength of reaction is increased by the element of surprise. Subsequent losses only increase the strength of reaction.
Fifth, while being with a position in the market, they do not think about its size, they do not treat it as "money". "Think about points, not money," as one billionaire trader says.
Recommendations of a psychological nature
In addition to the different approach in the "system" layer, we found several differences of a psychological nature between the best and the rest group. The following recommendations are based on them.
Each of us has our "pain threshold" for losses, i.e. the level at which we begin to feel them as troublesome. It is a good idea to set your "pain threshold" on a daily, weekly and monthly basis and never exceed it. The pain threshold is mainly due to the level of cash we are used to.
"Glass ceiling", that is, the size of the position, which begins to breed stress, even in traders - multimillionaires.
Another problem is related to this area, there are situations in which traders reach a certain level of capital and are unable to go further. This effect I call the "glass ceiling" effect.
One very experienced trader (a multimillionaire) told me that he feels a lot of discomfort with position size (i.e. possible loss) above half a million dollars. His solution - he doesn't go beyond that size, even tries to stay firmly below it, so he sleeps soundly.
Another currency trader told me how he was unable to break through a certain account size for several years. He was able to make a good result quickly (let's say it was 100,000) and then took five times as long to build another hundred. It cost him so much effort that in the end he decided that he would stick to an account size under 100,000 and specialize in what he does best - driving up to 100,000.
I have also had to deal with situations where the mental shock was caused not by a loss, but by a large profit made one day (400% of the account on huge traffic after a terrorist attack). This is the result of a strong breakthrough of the "glass ceiling" and the trauma that was created. And as a result of it, the trader for more than a month (until therapy) was unable to return to the market with even the smallest position.
The area of "glass ceiling" problems is still quite unknown. According to studies and observations, traders require some kind of therapy or the use of techniques to tame higher levels of profits and losses, because psychological reactions (which always occur) are a block to reaching higher financial levels.
For quite a number of investors, even those with good trading systems, achieving the higher level of profits they dream of is impossible for this very reason. Sooner or later (and the better the system, the sooner) they will encounter a level of capital at which they will feel uncomfortable and at which severe stress and great discomfort will begin to appear during the trading.
Toxic hope and the desire to trade-back
In studying how losses occur and accumulate, I have developed some additional tips. For your own financial security, it's worth treating the desire to trade-back and the greed that prompts you to increase your positions as two very toxic feelings. Hope ("that the market will turn around") works similarly.
Some of the traders surveyed have developed a reaction - as soon as these feelings arise they walk away from the platform and do something else while waiting for the market to recover.
Other experienced traders at the very beginning of the day - ask themselves an additional question, whether for some reason they are under pressure to trade (for example, because of losses) or whether they feel euphoric after earlier gains (which prompts carelessness).
It is good to know that recovery from difficult experiences is possible, only that it requires an individual approach. You can use methods of withdrawing memories, recoding (reframing) their meaning, or something of a lighter caliber if the loss was not very severe. This allows you to return to the market fairly quickly without negative effects.
I will describe one such method in the next issue of New City Trader. Thanks to it, a trader who was completely mentally shattered and unable to return to the market after an emotional shock - "got it together" in a few hours. This was one of my most interesting experiences, especially since the effect was practically immediate, and the problem never returned.
Summary
Summarizing the results of the study, it can be said that one of the goals of investors should be to take care of their mental comfort while trading, and for several reasons.
Firstly, our decisions are then better and quite naturally "zona" - the best mental state supporting investors - can appear.
Second, we have a better picture of the situation not disturbed by impatience, euphoria or emotional pressure of any kind.
Third, if we feel comfortable in our workplace we are eager to return to it, thus avoiding a situation where we feel compulsion and anger when sitting down to analyze. This in the long run can make us hate our job. There's no need for that, after all, we're trying to make money in the market in order to increase the quality of our lives, not decrease it, aren't we?
Fourthly, matters of psychology and comfort in investing are becoming better researched and there are more and more effective solutions.
Give it a boost 🚀 and drop a comment so we know to publish more for you. Cheers!
Follow: www.tradingview.com/u/drSwierk/
"I suffered a series of severe losses, and to this day I still can't recover from it." - this is how an investor friend described the more difficult period he was going through. Life events made him more stressed than usual and on top of that, a series of losses happened to him.
As a result, he was unable to return to the market. He sat in front of the computer, looked at the signals being drawn and... was unable to enter a position.
During a later conversation, he took out a thick binder full of color printouts of the market.
- If I had entered today I would have made a lot of money. I analyze the last few weeks and see how much I would already have in my account. My wife laughs at me for becoming a demo investor. She has already accepted that I sit in front of the screen for hours and don't trade.
This story has a fairly neutral ending. The standard of living and the family remained intact, and the investor was left with ample capital to live a quiet life, dating back to his days as CEO.
But for many investors, the inability to return to the market is a disaster, as they have to look for another source of income.
Other stories end worse. Much worse. Investors lose assets (sometimes not their own), embezzle company money, lose their homes (a loan in the bank against collateral), fall into alcoholism and drugs, get into mental problems. Those who carry emotional problems into the family lead to breakups and suffering.
In extreme cases, symptoms of post-traumatic stress disorder appear, which can drag on for years turning life into hell. In many of the situations described, further trading can be forgotten.
The problem of losses and how to react to them is very serious, especially since there are no good sources of solutions that can stop the problem or reverse it at all.
What the best traders do differently?
To "bite" the problem a few years ago, while researching top investors, I started asking myself questions - how do they deal with losses, what methods do they use, what has allowed them to survive so long without negative side effects? Long-term and systematic profits are surely some kind of guarantee that these people can cope.
Studying the best we discovered several reasons, some of them are due to the different approach to the system and the way they trade, some are the mental work techniques they used.
According to the research, the best traders approach the system and its results quite differently.
First of all, their systems are well prepared and tested. Among other things, this is the result of many years of experience in the market. Good preparation means less stress, weaker mental reactions during the trading, greater resistance to unfavorable turn of events, belief or knowledge that despite difficulties and losses everything will end well.
Second - they perceive the purpose of the system and the outcome of a single order differently. Here they fundamentally differ from others. They know that the outcome of a single order is unknowable, so they do not get attached to it. They also know from experience that, for example, at the end of the month they will still come out ahead.
Third, the fundamental uncertainty of what the market will do makes them not risk too much, a fraction of the account, hence the high margin of safety. It will allow them to "trade back" many times over. If they risk more) sometimes a lot more) they know very well why it's worth it, they don't make decisions on the spur of the moment. The opportunities they hunt for are very good indeed.
Fourth, they know the efficiency of their system and what the maximum sequence of losses can be for them. Knowing the "worst possible variant" is reassuring, being mentally prepared we are better able to withstand a series of losses. In beginners or the unprepared, the strength of reaction is increased by the element of surprise. Subsequent losses only increase the strength of reaction.
Fifth, while being with a position in the market, they do not think about its size, they do not treat it as "money". "Think about points, not money," as one billionaire trader says.
Recommendations of a psychological nature
In addition to the different approach in the "system" layer, we found several differences of a psychological nature between the best and the rest group. The following recommendations are based on them.
Each of us has our "pain threshold" for losses, i.e. the level at which we begin to feel them as troublesome. It is a good idea to set your "pain threshold" on a daily, weekly and monthly basis and never exceed it. The pain threshold is mainly due to the level of cash we are used to.
"Glass ceiling", that is, the size of the position, which begins to breed stress, even in traders - multimillionaires.
Another problem is related to this area, there are situations in which traders reach a certain level of capital and are unable to go further. This effect I call the "glass ceiling" effect.
One very experienced trader (a multimillionaire) told me that he feels a lot of discomfort with position size (i.e. possible loss) above half a million dollars. His solution - he doesn't go beyond that size, even tries to stay firmly below it, so he sleeps soundly.
Another currency trader told me how he was unable to break through a certain account size for several years. He was able to make a good result quickly (let's say it was 100,000) and then took five times as long to build another hundred. It cost him so much effort that in the end he decided that he would stick to an account size under 100,000 and specialize in what he does best - driving up to 100,000.
I have also had to deal with situations where the mental shock was caused not by a loss, but by a large profit made one day (400% of the account on huge traffic after a terrorist attack). This is the result of a strong breakthrough of the "glass ceiling" and the trauma that was created. And as a result of it, the trader for more than a month (until therapy) was unable to return to the market with even the smallest position.
The area of "glass ceiling" problems is still quite unknown. According to studies and observations, traders require some kind of therapy or the use of techniques to tame higher levels of profits and losses, because psychological reactions (which always occur) are a block to reaching higher financial levels.
For quite a number of investors, even those with good trading systems, achieving the higher level of profits they dream of is impossible for this very reason. Sooner or later (and the better the system, the sooner) they will encounter a level of capital at which they will feel uncomfortable and at which severe stress and great discomfort will begin to appear during the trading.
Toxic hope and the desire to trade-back
In studying how losses occur and accumulate, I have developed some additional tips. For your own financial security, it's worth treating the desire to trade-back and the greed that prompts you to increase your positions as two very toxic feelings. Hope ("that the market will turn around") works similarly.
Some of the traders surveyed have developed a reaction - as soon as these feelings arise they walk away from the platform and do something else while waiting for the market to recover.
Other experienced traders at the very beginning of the day - ask themselves an additional question, whether for some reason they are under pressure to trade (for example, because of losses) or whether they feel euphoric after earlier gains (which prompts carelessness).
It is good to know that recovery from difficult experiences is possible, only that it requires an individual approach. You can use methods of withdrawing memories, recoding (reframing) their meaning, or something of a lighter caliber if the loss was not very severe. This allows you to return to the market fairly quickly without negative effects.
I will describe one such method in the next issue of New City Trader. Thanks to it, a trader who was completely mentally shattered and unable to return to the market after an emotional shock - "got it together" in a few hours. This was one of my most interesting experiences, especially since the effect was practically immediate, and the problem never returned.
Summary
Summarizing the results of the study, it can be said that one of the goals of investors should be to take care of their mental comfort while trading, and for several reasons.
Firstly, our decisions are then better and quite naturally "zona" - the best mental state supporting investors - can appear.
Second, we have a better picture of the situation not disturbed by impatience, euphoria or emotional pressure of any kind.
Third, if we feel comfortable in our workplace we are eager to return to it, thus avoiding a situation where we feel compulsion and anger when sitting down to analyze. This in the long run can make us hate our job. There's no need for that, after all, we're trying to make money in the market in order to increase the quality of our lives, not decrease it, aren't we?
Fourthly, matters of psychology and comfort in investing are becoming better researched and there are more and more effective solutions.
Give it a boost 🚀 and drop a comment so we know to publish more for you. Cheers!
Follow: www.tradingview.com/u/drSwierk/