Psychology

The Psychology of taking losses and sometimes winning

Perhaps the hardest thing to learn about trading is taking losses. Maybe it's not something you learn, but something more innate. It applies to masters in all disciplines, dealing with failure. It seems we can never avoid failure, we just learn to deal with it, or we just have that persistent nature that allows us to persevere.
There's a nice little story, which unfortunately refers to US sports. I wish I were sport minded enough to quote Australian statistics to demonstrate the same thing, but a sports fanatic I'm not.

A troubled man paid a visit to his Rabbi. A wise and good old rabbi, as all rabbis try to be. "Rabbi," he said, "I am a failure. More than half the time I do not succeed in doing what I must do."
"Oh?" said the rabbi.
Please say something wise, rabbi," said the man.
After much pondering, the rabbi spoke:
"Ah, my son, I give you this wisdom: Go and look on page 930 of the New York Times Almanac for the year 1970, and you will find peace of mind.
Now this is what he found: The listing of the lifetime batting averages of all the greatest baseball players. Ty Cobb, the greatest slugger of them all, had a lifetime average of only 0.367. Even Babe Ruth didn't do so well.
So the man went back to the rabbi and said in a questioning tone: "Ty Cobb - 0.367 - that's it?"
"Right," said the rabbi. "Ty Cobb - 0.367. He got a hit once every three times to bat. He didn't even bat 0.500, so what can you expect?"
"Ah," said the man, who thought he was a horrible failure because only half the time he did not succeed in what he must do.

Often, good traders, take losses up to 70% of the time. Despite these losses being hopefully small relative to the wins, it's still demoralising to have to accept a string of losing trades.
There are some that have such contempt for money outside the trading arena it allows them to take losses in their stride. They see it as the ebb and flow of the system, focusing on the end of the campaign rather than the individual trade. They see themselves as winners at the end of the day and will often trade for 24 hours straight to claw back losses so they can walk away seeing themselves as winners. The day doesn't even have to be profitable, but if they've come back from a bad loss early then, to that type of mind, it's been a successful day.

I recently met a trader who said he places a stop with every trade he instigates and he immediately sees it as a cost. He has already spent the money when instigating the trade, so he can only come out a winner. He figures he can't lose what he has already spent.

So what chance do we have to make money? It's the law of probability and persistence. We know that if we toss a coin enough, the results will always tend toward 50/50 heads and tails. However if we take any smaller sample we would expect to find a skew one way or the other.
So it stands to reason that if we make our bets small, cut losses ruthlessly and maximise our wins. We will be winners at the end of the day.

Finally, traders often blame the market for their losing streaks. Good traders blame themselves. How often do you think the market has changed? You may think your system, your method isn't working anymore. The markets are always changing, so perhaps we should be examining how it is that we relate to these changes.

I tend to look at the market in simplistic terms. In terms of vertical moves and trading brackets. At any given time, we should try to recognise change or continuation, whether it be a vertical move or a rotating trading bracket. The question we ask ourselves is "will it continue or is it changing?" Then, if we're picking it right, we feel like we are in tune with the market, we can up the bet. If not we should recognise that we are out of step and be more protective of our capital during these times and minimise the risk. Maybe it all comes down to knowing ourselves, knowing when we are picking it, when we are relating to the market, not fighting it.

As in anything in life, some people are naturals, some people have to work at it, but everyone can do it with some degree of proficiency, if they try. But even the masters can't do it 100% of the time, in most cases not even 50% of the time. In the case of the US baseball players the best is 36% of the time. But like good traders and Greg Norman they keep fronting up, everyday. Such is the elusiveness of success, no matter how you measure it.