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I knew a guy in college that struck out nearly every time he approached a woman at the bar. He would saunter up, introduce himself (so far so good), and then say something that caused them to roll their eyes and walk away. Sometimes worse.
After seeing him crash and burn about 5 times in row, I couldn’t take it anymore.
“What the hell are you saying to these women?”
His response left me wondering if he’d been watching too much Pulp Fiction.
“I ask them if they’d like a foot massage.”
He then told me the story about how one time, in Miami, a few friends dared him to use that line with a beautiful woman. And it worked. He actually ended up back at her apartment, giving her a foot massage… and you can use your imagination to fill in the gaps from there.
The results of his initial experiment were so positive that, no matter how much evidence he now had to the contrary, he couldn’t recognize that far too many variables had changed for his strategy to work anymore.
You can see where I’m going with this in regards to trading.
It’s really, really difficult for us to re-train our brains to understand that something that once worked, no longer works. The feeling of seeing a certain series of events lead to profits, and the ensuing pleasure response in our brains, lays down actual neural pathways that will make us want to do the same thing over and over again. From an evolutionary biology perspective, it makes sense.
That’s why learning how to lose differently every time you lose money is one of the most important skillsets you can develop as a trader.
Losing money is a part of trading, and it shouldn’t be judged negatively. If anything, losing money in the short term can lead to serious profits in the long-term. Whether it’s a feeler trade you’re using to see how a market maker reacts to your bid or a significant loss that reveals a change in the market regime, there’s plenty to learn from losing trades.
The caveat is that if you’re losing money the same way, over and over again, you need to recognize that and change it immediately.
For one, think about the fact that it’s quite likely that the same person (or algorithm) is often on the other side of your losing trades. Especially if you’re trading in size and/or in out of the money options or thinly traded equities where your orders are a lot easier to distinguish. They’re seeing a pattern and capitalizing on it; you’re trying to recreate history by forcing an old trade that doesn’t work anymore. That’s the exact opposite of the situation you want to be in.
Secondly, when you insist on trying the same thing over and over again, you’re not being guided by the information in front of you; you’re being driven by the past. When you ignore what the market is telling you, you’re a lot more likely to hold on to a losing trade when you should’ve cut it short. You’re also missing out on the opportunity to assess what’s changed since the time your trade worked, adjust your strategy, and experiment differently the next time around.
So how do you make sure you’re losing differently?
- Journal your trades. It’s a no brainer. It will create more self-awareness and help you track your winners, losers, and the patterns behind them. This one is especially important for beginning traders.
- Detach yourself from results. Yeah, the most difficult part of the entire shabang. But if you can do it, you’ll allow your mind to look at the data from a losing trade and a winning trade with the same perspective: one that just values the information you can glean from the experience to inform the next trade. Maybe this means having a side hustle so you aren’t dependent on your trading for income. It could also mean not boasting about your winners, which further attaches your identity to short-term monetary success.
- Don’t assume one winning trade proves anything. Again, this is an especially easy trap for beginning traders to fall into, especially when they get their first wining trading in any kind of size.
- Aim small, miss small. If you’re trying something new, make it easy on yourself and start small. It’ll reduce the number of variables you have to be concerned with for assessing whether the trade works, give you more shots on goal, and ease the psychological burden of a loss if it happens. Even more importantly, it may save you from getting lucky on your first try, winning big, and getting addicted to trying to recreate that pattern over and over again.
- Think back on your biggest winners. Ask yourself whether you’re trying to recreate them, and if so, whether it’s working. Do you still have an emotional connection to those trades that you’re chasing? If you can’t be honest with yourself about that question, you’re in trouble.
The markets force traders to constantly reinvent themselves and their strategies. It’s one of the most torturous and yet redeeming parts of trading. It’s why the majority walk away and others use it as the defining challenge of their life. Your perspective on it is up to you, but you better have one!
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