On Becoming a Great Loser

Easily overcome trading losses with the Loss Ritual

When I began trading I chased after the big wins that I thought would push my equity curve up. To my surprise, even when I hit a big win, my losses had a way of wiping it all out.

During that time, my trading was like a roller coaster ride – huge wins followed by big losses. Looking back, I realized I was ignoring a crucial aspect: learning to handle my losses more effectively.

Fortunately, I recognized this (better late than never) and started focusing on improving how I handled losses. I was reading "The Disciplined Trader" by Mark Douglas at the time, and it triggered a shift in my mindset – one of many. I understood that there was still a lot of work ahead.

In trading, you gotta learn to be a great loser in order to become a big winner.

In my last newsletter, I talked about how to practically cut losers short. In this one, I’ll talk about the psychological side of losing and share an exercise that can help you overcome losses faster.

Dopamine and Losing

The brain's motivational system is much more complex than what brings out to the public. We hear that dopamine gets released with the achievement of a reward. However, studies show that the release of dopamine happens before the reward, with our brain’s ability to predict it. Dopamine signals success, but it also signals when you only manage an uncomfortable near-miss.

Research on roulette players found that their brain's nucleus accumbens showed activity when they experienced near-miss losses, much like when they had won. In this case, dopamine seems not to be signaling pleasure but indicating how close they got to the reward and encouraging another attempt. This is what gives them the urge to keep playing much of what happens in revenge trading.

Did you know that casinos use this mechanism in slot machines to keep people playing?

They design games that seem like a win is imminent, only to barely miss it in the end. Studies reported that dopamine release was evident in people performing a gambling task, but that the increased activity was associated with reward prediction or anticipation rather than the actual presentation of the monetary reward.

So, when the price barely missed your take profit for a few points or even just one, on a biological level, your brain is going to be your worst enemy. It anticipates a reward with dopamine, but if the expected reward isn't achieved, dopamine levels plummet below baseline, leaving you frustrated. This effect is worse than an immediate loss where your expectations are way lower. The result? You’ll want to keep on trading!

Although this mechanism is used everywhere at casinos to manipulate people into continuing to gamble, we are not in the gambling business. This is just one of the many human traits that difficults our progress toward trading success. If you want to take trading as a probabilities game, you need to learn to intentionally counter the chemistry of your brain. Being aware of these processes is already a first step.

Gaining a New Perspective on Losses

Humans avoid losses – it's wired into us. We naturally seek pleasure and avoid pain.

Traders come up with many ways of denying a loss, such as holding on to a losing trade and hoping it will turn around, adding to losing positions, or oversizing from one trade to the next one.

However, trading efficiently means accepting losses, moving on, and entering each trade isolatedly - make sure to reset your mindset between trades. How can you align yourself with this approach?

The best way to take a loss is to anticipate it.

Don't be caught off guard.

If you go into a trade expecting that it may be a loser, you won’t be as bothered should the trade go against you. You’re lowering your expectations and considering the worst-case scenario to better accept it.

If, on the other hand, you avoid considering the possibility of a loss, you’ll become easily frustrated when you are in the midst of a losing trade. If your expectations aren’t aligned with reality, you’ll always tend to the positive side of things - positive bias - and, deep down, expect a win. This is especially true for beginners with less experience.

It is much more useful to accept the fact that losses are inevitable and all you need is to learn to keep them small while following your plan. This is something we all want as traders but it just doesn’t come naturally to us. We need to implement methods that force us to go against our natural instincts and repeat them trading day after trading day until they become overlearned.

On the other side, it’s also crucial to not take losses personally.

Traders who tie their self-worth to money are especially vulnerable to strong emotions when they lose.

When you seek to feed your emotional needs through trading, your performance becomes a mirror of your self-image.

When this happens…

• Your overtrading becomes a mechanism through which you fill the void of unworthiness;

• Your oversizing becomes a compensating method for the “not good enough” feeling you get after a mistake;

• Your early entries become a way to satisfy your ego in getting a bigger risk to reward.

• Your early exits and fear of missing out become a way to achieve the high standards and perfectionism you set for yourself.

These are only examples but real ones.

Traders’ mistakes come from the way they see themselves.

When you see tough market situations as an attack on your identity, your first instinct is to protect it. The way you do it has everything to do with the way you perform. When you try to protect your identity in the markets rather than trade with a neutral view, focusing on your strategy and the information the market is presenting, your perception gets distorted.

The key is in detaching your self-image from market events and trade impartially. It’s crucial to tackle unsolved limiting beliefs or else you’ll find it difficult to work in your trading mistakes effectively. Your trading is just one of the ways through which your limiting beliefs manifest. Look at the big picture and see how they’re also affecting your relationships, self-image, and pretty much everything in your life.

So take the time for introspective work. Too often, the solution for traders’ problems starts there. That’s why trading cannot be taken individually, it’s a lifestyle. And you’re either fully invested in improving yourself as a means to succeed in trading or you’ll struggle to achieve the performance you want.

Loss Ritual

The loss ritual is a tool I use in my coaching methodology to help traders effectively manage the psychological impact of losses and readjust their perspective.

Every trader should have some sort of loss ritual in place to execute after one loss or one losing day. The loss ritual you set for yourself should help you put the loss/losing day into perspective and give you a sense of control and positivity about your next performance.

Here’s the one I use:

1. Pause: Take a moment to step back.

2. Review Your Plan: Did you stick to your trading plan without mistakes? If yes, the loss is just part of the business. If not, figure out what went wrong.

3. Write Down Your Feelings: After the loss, be honest about how you feel and channel your emotions into paper or voice recording.

4. Take one lesson out of the loss: If the loss was reasonable, jot down the best things you did during the trade and ways of repeating those. If it wasn't, note where you went wrong and how you’ll improve next time.

5. See Beyond: Ask yourself: What extra piece of information the market gave me by stopping me out? And how can I use that in the next trades?

6. Next steps: Outline what you’ll do based on the previous questions and follow the plan. You might choose to step back from the charts if it’s your third loss in a row. Or you might want to continue trading if it’s the first one. If so, what will you pay attention to? How will you behave?

Final Words

Ingraining that losses are inevitable isn’t enough. Every trader is aware of that fact. The real test is turning that understanding into action. Change starts in the mind, but until you match your responses with what you already know, progress won't occur. You gotta be the one to take the first step outside of the autopilot mode that’s been affecting your results. Take that initial step, and you'll set the momentum for change in motion. You’re in the driver’s seat.

ONE TRADE PHILOSOPHY

One trade should not…

Break your account

Break your confidence

Break your spirit

Define you as a trader

Define you as a person

Break your belief system

Derail your success

Overexcite you

Win or Loss, one trade is simply… One trade

With love,

Sara

If you’re ready to improve your trading performance, here are the two coaching programs I’m running:

1. The Peak Performance Trading Program: close guidance with various time frames available.

2. Individual Session Packages: Six or twelve individual coaching calls that can be scheduled flexibly within six or twelve months, respectively.