I can’t repeat it enough: Losses are part of trading! They will happen, often when you least expect it.
The challenge is to learn to accept this reality without allowing feelings of disappointment and grievances to carry on and turn into irrational fears.
But how to do this?
If you’re a regular reader of this blog, you know that mindfulness is part of the solution, but one must first revision the nature of the problem.
In the midst of a drawdown, traders tend to get into a negative feedback loop: losses lead to worry, worry leads to emotional trading, emotional trading leads to more losses, more losses to more worry… it’s a cycle that eventually ends when you’ve blown your account.
Hence, the first step is to start thinking about trading in a different way; we need to understand what it means to play the numbers game.
The Numbers Game.
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Here’s what playing the numbers game means:
We understand that we’re dealing with uncertainty.
Uncertainty is the name of the game.
The market has an element of randomness that no trading strategy can dispel.
This element of randomness creates the necessity to approach the market only if you can come up with a strategy that has a positive expected value.
This way, a fair number of times you’ll lose (due to random variation), but try enough times and you’ll get ahead.
We’re thinking in probabilities.
Again, we’re dealing with uncertainty. Hence, the idea of probabilistic thinking is to make clear the fact that we’re placing and managing our trades based on partial knowledge.
This means that no matter how big our edge is we understand that we will never know all the variables that affect the market and all the ways that our assumptions can be invalidated.
If we had all the variables, all of our trades would be winners (we would create certainty) and there wouldn’t be any demand for a probabilistic approach in the first place. (and trading wouldn’t be that interesting and rewarding.)
But there is uncertainty, and this is a fact.
A probabilistic approach ‘forces’ us to acknowledge that we know less than we’d like to think and it helps us develop humility and acceptance of thing that are out of our control.
No matter how much you want a particular outcome to materialize, you can’t force it to happen. But what you can do is follow a process and let the numbers play out in your favor over time.
We’re managing risk.
A fair number of times, there will be losses. We’ve made that clear.
We don’t know when they’ll happen but they’ll happen.
Sometimes your mind will be screaming “THIS trade WILL be a massively profitable trade”. And then it ends up being a loser.
Sometimes your mind will be screaming “This trade… it’s a SURE loser.” Next thing you know, it’s a winner.
So, in the face of such uncertainty, what’s left for us do is to be extremely disciplined with risk management without letting your fantasies determine your decisions.
Risk management is crucial ―it ensures survival under negative outcomes (which, again, are inevitable!) and guarantees maximum returns under favorable ones.
Don’t become too attached to short term outcomes. Have a strategy with a positive expected value and play the numbers game.
We’re thinking long term.
Trading is a numbers game. And with any numbers game, a long-term view is needed.
Tossing a fair coin is a perfect way to illustrate this:
Say you and I decide to flip a coin.
When the coin lands on heads, I give you 60 bucks; if it lands on tails, you give me 20 bucks.
In the short-term, anything can show up, yes? Even though the bet isn’t that advantageous for me, in the short-term I can hit a string of tails and you might wind up paying me 80 bucks.
But as we keep tossing the coin, you’re almost certain to win more than me.
So, when playing a numbers game, results matter, but they do not matter in the short-term.
Hence, trading, if you’re going through a string of losses, no matter how bad and painful it may look and feel, it is very important to remind yourself that this is part of probabilities. If you’re trading a proven system, the numbers will eventually work themselves out. No storm lasts forever.
When you get attached to short-term outcomes, you freeze your desire into a rigid framework which interferes with the whole idea of having the numbers work in your favor.
We’re ignoring the noise.
With the advent of technology and social media, it’s become very easy for some people to paint an inaccurate picture of what this profession is all about.
You typically see that on Twitter: some people display winners only and portray themselves as winning traders by displaying pictures of their lavish lifestyles to make others envy them. (For what ultimate end, I do not know.)
For the undiscerning trader, this is a trap that locks him/her in a perpetual cycle of self-doubt and comparison.
Never let anyone’s opinion get in the way of your plan. No matter how skillful or successful they are.
Opinions are noise. When you start to think for yourself instead of letting all the noise determine how you feel about your own trading, that’s the beginning of wisdom.
One thing to understand is that, in trading, the path is anything but linear as those scam artists pretend.
Yes, trading can be a wonderful way to make money (and a lot of it), but that does not happen in a straight line. Read any of the genuine success stories and you’ll almost never see anyone who describes the path as simply linear.
We might wish the path to be as such, but in reality, it’s not.
This conceptual reframing of trading (playing it into a numbers game framework) can generate a profoundly different paradigm.
Our normal paradigm when taking losses tend to be this:
“I suck; this sucks; I feel horrible; the market is after me”. (etc., etc.)
The new paradigm is more like this:
“This trade was a loss; I’m playing the numbers game so it doesn’t really matter… it doesn’t really bother me.”
It’s not about denying how you feel and pushing away frustration or disappointment if it’s present in the mind, it’s about developing a quality of wisdom and acceptance.
This is where a consistent mindfulness practice will come in handy.
Mindfulness is everywhere now and many people have different definitions of it and think of it in different ways.
It’s important to understand that when you say mindfulness, you’re talking about a strategy of attention.
It’s really learning how to pay attention in a certain way. There’s a great emphasis on the objects of awareness and being fully present with them. We pay attention (nonjudgmentally) to breath, thoughts, emotions, sensations, sounds, and notice their impermanent, insubstantial nature.
It teaches you acceptance, discipline, focus, and in different traditions it’s considered to be the direct doorway to enlightenment – my interpretation enlightenment is that it’s a more conscious way of being and acting in the world.
This doesn’t come overnight though; it comes with time and experience. That’s why it’s referred to as a practice.
Last Few Words…
I’ve been trading (for a living) for over 13 years now. I haven’t been profitable right from the start –I’ve made all the mistakes imaginable.
And over the years, I’ve worked with many people who struggled with similar issues.
My field experience tells me that the above formula (Playing The Numbers Game + Mindfulness) gets you results.
It’ll improve your trading provided you spend some time understanding such concepts and working with them.
So do what you need to do, train yourself, develop your understanding, and perhaps above all, be patient. Skill deepens with time.