The art of living your life has a lot to do with getting over loss. The less the past haunts you, the better.
Richard Ford
After considering current market conditions and the
condition of your stocks; you've decided to take a $1,000 loss. When
this happens most of us experience anger, our ego suffers, and we wish
it just didn't happen. You rationalize: It's the nature of the game;
it's my tuition in trading school. You can't stop thinking, however,
about bills that are due shortly or that planned vacation in a month.
Thinking, $1,000 is a lot of money, I can't consider it a minor setback
and move on. That however is exactly what you have to do. The
dynamics of risk aversion and loss taking run deep in most of us. As a
trader you must step back: look at the big picture, understand that if I
work hard enough and under the right market conditions I'll come out
way ahead.
Trading the markets whether on a full time or a part time basis is a
business, not unlike any other business. Yes, this business involves
risk, but so to do all other businesses. Corporations, large and small
alike, also have trouble taking losses. Behavioral economists have
shown that companies often go bankrupt rather than admit that their
business pan needs reworking. Bankers will often refuse to write off
bad loans because they don't want to admit that they mistakenly lent it
to people, or companies, that were a bad risk. Institutional money
managers leave losses on paper because they are afraid to own up. Many
investors will not even open their brokerage statements during bad
times; "out of sight, out of mind."
Feeling guilty taking a loss isn't irrational, it's human nature. There
is a strong biological urge in all of us to protect ourselves and our
loved ones. In today's world that means having enough money to pay for
food, clothes, and housing. Therefore when we lose money as a trader it
hurts, especially when you think of what that money could purchase. As
children we were taught by our parents and teachers to protect
ourselves and to do what you need to make money and save it. Losing
money on a trade therefore will make us feel guilty, and depending upon
the size a little panicky. As an active trader you must change your
thinking. You must fight against your natural inclinations and learn to
take losses.
Perhaps the first step is to admit to yourself that you feel guilty.
Realize the guilt is the result of you're taking a risk that could
inadvertently harm you and your family. The loss is particularly hard
to accept if you really need the money to pay basic living expenses as
opposed to money set aside for trading purposes. You should never use money set aside for basic living expenses to trade.
If you know that you've done everything to minimize risk and you truly
know that you can survive a worst-case scenario, you'll be able to take a
loss more easily.
Mentally put your trading capital in a different compartment from the
monies set aside for your personal life. Learn about risk management
Risk Management - An Introduction and build up enough capital for trading.
Next identify, then refute, assumptions about risk and loss. Make a list
of justifications that
you can read after you have lost: "Losses are
a business expense"... "It's like a personal investment in my trading
business"... "It's like paying tuition in order to learn important
trading lessons." These sayings may not work at first. It's hard to
change your expectations over night. It takes practice. Losses are a
fact of trading life; they still can be difficult to accept. Remember you're fighting your own natural biological forces!
For changes to be of any true value, they've got to be lasting and consistent.
Tony Robbins
Trading can be lonely and very stressful, especially if one is trading from home and alone during market hours. When market conditions are optimal and in line with your methods, it can be a real "high" with win after win after win. It is quite a different story however, when you face seemingly endless setbacks. You begin to feel the strain yet you attempt to keep going. As the markets go through cycles of up and down, traders often go through emotional cycles with feelings of excitement, frustration, and boredom. This may be one of the primary reasons many traders eventually burn out. I'm sure you've all heard stories of master traders who were at the top of their game in the 1990s, but are out of the business today.
Trading is a profession in which you must cultivate a fighting spirit, in order to cope with new challenges and daily hassles. Trading the markets is stress provoking, if you don't watch out; you may collapse under the strain. By controlling stress, you can build up your psychological resources, combat stressful events, and endure lasting success.
Probably the first step in controlling stress is to maintain a balance between your work (trading) and your personal life. No matter what the percentage, you must devote a reasonable amount of time to family life. Trading should not be your whole life. Think for a minute; what good is all the money in the world without loved ones to share it with. Money just makes you more of what you already are. Make a good effort to form significant relationships with family and friends, this is very important. The relationships not only allow you to feel connected to others, but under some circumstances, they can provide much needed emotional support. Accepting help and support from those who care about you, and who also understand the pressures of trading, can help you ease stress.
Next step set goals that are in line with your experience and skills. Be very careful not to set goals that you cannot possibly achieve especially when considering your experience and skill level. Any skilled professional must go through years of school then more years of training before he/she is considered a skilled professional in their field. Trading the markets as a professional is no different it requires years of experience and learning. If you are relatively new to trading, learning goals such as reading new trading books make more sense than performance goals such as making a 20% return. Over time you will hone your skills by taking small concrete steps and that will help you cope with stress and ensure that you make steady progress toward achieving your goals.
Keep everything in perspective. Your long-term goals are to develop skills that will make you profitable over the long haul. Try to consider stressful situations, and minor setbacks, in a broader context. Avoid blowing events out of proportion. Don't make a big deal about minor setbacks. Setbacks should be expected. Focus on the long-term perspective: With time and practice, you'll become a seasoned trader. Stress can kill, especially in the markets. Winning traders try to execute trades calmly, logically, and effortlessly.
Getting yourself into this ideal mental state requires you to deal with stress. Take care of yourself physically; build up your psychological resistance to stress, dedicate time to family and friends. Find the time to engage in activities that are fun and relaxing. If you learn to cope with stress, you will sharpen your psychological edge and endure lasting success.
