Every one of us has an inbuilt psychology of trading. There is usually a gap between the expectations and the final results for the market. And we try to analyze the evolution of the market using a rational approach. One needs to not only work hard on the phenomenon of losing, but also try to understand his response to it.
On a general note, losing seems to be something bad which everyone wants to avoid, but traders with some experience realize that it is the only thing we can control through money management.
Whatever the case, one’s approach towards losses should be to keep them as small as possible. The lower a loss, the better.
But why does it have to be as small as possible?
Well, traders want to make as much profit as possible, which implies that, if there are to be losses at all, they have to be small, don’t they? Although the goal is to make profits, it doesn’t compulsorily mean one must have the lowest loss possible, because when you let a volatile market continue, it hardly ever rewards you with profit.
What is the most important thing to understand about losing?
To begin with, we must understand what it means to lose, the effect of a loss on us, how it impacts the way we make decisions. That is only when we can set up effective money management within our marketing strategy.
What does losing mean?
Losing is the state of decrease to specific units. A loss can occur in any of these three ways:
- a) Loss per trade
- b) Overall loss
- c) The subjective feeling of loss
Loss per trade
This refers to the highest suffered loss that a trader has chosen and which he finds tolerable per one trade. He can set it at a specific amount or in percentages or pips. This kind of loss is dependent on the trader’s money management and has to be integrated into his original strategy.
This is an index that indicates the entire course of your trading. It represents the difference between the total profit and the total loss per a set duration. A negative sum implies that there is an overall loss. It enables you to assess the success rate of your strategy and money management.
The subjective feeling of loss
The two options considered above are much less complex compared to the subjective feeling of loss. This feeling impacts the two options naturally throughout your entire trading experience, from the initialization of your marketing strategy up to its evaluation.
It shows your response to trading, money, and markets, but more importantly, it shows your response to yourself. This feeling varies among different traders and its intensity varies as well. This is due to the trader’s prevailing mindset and approach to the activity. In many cases, though, it bears semblance to sadness, frustration, and anger.
These feelings occur only after one has suffered a loss, but before then, one is taken over by another strong feeling, which is fear.
The fear of loss is firmly etched in us and is linked to strategic thinking, in which plans and expectations are made about a specific situation in the future. Since strategic thinking is about the future and all the likely outcomes, it naturally considers a losing scenario. Then the mind is fixed entirely on the problem and attempts to eliminate it with all its power. Because the focus is on a possible obstacle and energy is being expended on an unsolvable situation, fear begins to drive our actions and decisions.
Everyone understands that nobody likes to lose something they have already got. But if you understand your psychology and master your emotions, you can settle in your mind that you are going to invest only as much as you are prepared to lose. This way, your emotions can then step aside for the decision-making system, devoid of any misleading inner predispositions that would give you false information.