Why Traders Intentionally Make Mistakes That Cost
Traders do make mistakes, knowingly, that cost them money, but why?
I explore this question and topic in a video which you can view by clicking the link below.
Why Traders Intentionally Make Mistakes Video
I would love to hear your thoughts on the matter.
Brian
P.S. The launch date is set for the new course on how to trade in harmony with your emotions.
Mark your calendar for March 15th!
"Should There Be A “Trader’s Anonymous”?
So what constitutes an actual addiction? There are two categories of addictions, physical dependence and psychological addiction. There is a considerable amount of information on both and certainly beyond the scope of this article, but a brief summary follows
From Wikipedia, the definition of “addiction” includes:
“Psychological addiction, as opposed to physiological addiction, is a person’s need to use a drug or engage in a behavior despite the harm caused [emphasis added] - out of desire for the effects it produces, rather than to relieve withdrawal symptoms. …. it becomes associated with the release of pleasure-inducing endorphins, and a cycle is started that is similar to physiological addiction. This cycle is often very difficult to break.”
“Psychological addiction does not have to be limited only to substances; even various activities and behavioral patterns [emphasis added] may be considered addictions if they are harmful….”
From Merriam-Webster Online, the definition of “addicted”:
“1 : to devote or surrender (oneself) to something habitually or obsessively”
So an addiction could be described as a person feeling the “need” to repeatedly engage in a particular behavior to satisfy a desire for the emotional effects that is has, the feelings that it produces. It is a desire that they have rationalized into a need, to which they have surrendered control, and they have allowed the behavior to develop into a habit. This is physiologically compounded by the endorphins released into the system that provide a physical sensation as well. Let’s look at some of the necessary practices (behaviors) of trading to achieve consistent profits and some of the behaviors exhibited by many traders to see if they support our hypothesis that trading is addictive.
One recognized critical practice for profitable trading is good risk management. At the heart if this is making sure that the risks you take are measured and calculated risks. You want to keep your losses small when they occur and avoid them all together when possible (such as NOT getting into bad trades). Key tools commonly used for controlling potential losses include risk / reward calculations and stop loss orders. Risk/reward calculations are necessary on every trade so that you know whether each trade is a sound business decision. Stops are used so that then a good trade is placed but the market doesn’t do what you’d expected. With the leverage in trading that can work for or against you, risk management is essential.
General money management is another critical practice to make sure that your trading business will still have the doors open months and years from now. It includes risk management but the focus is on a larger scale and a broader scope, such as looking at what percentage of your available capital you are placing on any given trade, regardless of the details of the specific trade.
These practices may appeal to the intellect, but how they feel is where traders get into trouble. There are several common mistakes repeatedly made by traders that bring large losses, missed profits, and ruin for many. These mistakes run in direct conflict with the known and established good practices for consistent and profitable trading, yet are made over and over again by the same traders. Since they are repeated, it would be reasonable to say that they have become habits. Let’s examine these habits from the perspective of the emotional response for the individual.
Trading without a plan, also known as entering a trade without an exit strategy for the trade. The trader doing this is usually not following a technical system and is going more on their hunches than sound calculations. This right here is an indicator that they are allowing their feelings to dictate their actions more so than their reasoning and rationale. If the market moves in their favor, it reinforces the decision to follow their intuition and feeds the ego in being right. Another very elemental factor is suspense. If one has the trade planned out and there are no surprises, it takes all the suspense out of it. Why do people love a good mystery novel or movie? They love sitting on the edge of their seats and reveling in the suspense of it all. When you know the end of the story it takes all the fun out of it and who wants that? Same with sports. It is not the score at the end of the game that compels people to play or watch. It is not knowing how each play and the game itself will unfold that provides the enjoyment.
Refusal to use stops. The comment often heard by brokers is “No, I don’t want to get stopped out. I’ll just watch it.” This is true for initial stops and quite commonly for trailing stops after the market has moved in one’s favor. The trader is putting a lot of energy in to their feelings hope and anticipation. The ego is also being fed here, “knowing” that the market will do as they desire. As the move goes their way, they are experiencing a tremendous thrill, plus the validation they desire about them being a better trader than they truly are. When the market moves against them, the opposite feelings are amplified and only create a greater need to be validated. This also again, involves a lot of suspense, anticipation and thrill of watching events unfold.
Over-trading regarding frequency, A.K.A. trading too often. Usually in this circumstance the trader is feeling the need to satisfy their perception of lack. They may have just experienced a string of losers or a very large loss and now feel that they have to recoup their losses and absolve themselves for the previous errors. They are feeling bad about themselves and rather than do what they know is right, they simply want to have the bad feelings go away.
Placing trades that are too large for the account. One of the more interesting aspects of this particular mistake is that besides the greed factor, people get a bit of a thrill going against the rules and particularly stepping outside their comfort zones. The simple act of rebelling or being adventurous is what many got a taste of when they first got into trading since it was so different from what they’d ever done before. The new territory has its appeal and stepping out of the norms and standard rules has a strong gratification associated with it. Of course the greed factor is pretty strong here as well. Only risking 2-5% of your account and the prospect of a measly couple hundred dollars just doesn’t match up with the big numbers one had in mind with trading, or what’s heard often in the ads for the various trading systems available. When you’re only making $800 on this trade and you see and an for a whiz-bang system that claims “I made $9,700 on my first three trades!!!”, that reasonable profit you made just isn’t very satisfying.
One thing worth pointing out right now, and it directly relates to our subject is the fact that people will make mistakes, but will only knowingly repeat them when there is a problem. If you get up out of bed in the morning and stub your toe on the footboard of the bed, you wouldn’t stand there and keep smashing your toe again and again. You’d stop, unless of course there was some sort of additional response that was strong enough to compel you to do it repeatedly until your foot was completely mangled. You’d only smash your thumb when hammering a nail once before you changed how you were holding the board – unless something was wrong.
In comparing the repeated trading mistakes with the established good practices, it is in the emotional responses of the mistakes being made. Suspense, personal absolution and validation, excitement, feeding the ego, being right… the list goes on and on. These can be very powerful and provide enough stimulus for the person for it to over-ride their better judgment. The actions involved in the two sets are in direct contrast regarding both the financial results and how they feel to the trader. Knowing the outcomes for a given trade, keeping the risk small, managing money wisely – these are boring by comparison and provide no suspense. Lacking surprise and done with a knowing, good trading provides a much ‘quieter’ confirmation of a traders ability on the emotional level. When you’re good and you know your good and produce consistent results, those consistent results are not a huge celebration. When you’re a rookie and you do well, it is much more gratifying, especially if you hit a big one. That’s a huge ego feed.
There is an inverse relationship between the discipline necessary for good trading practices and the emotions involved in unhealthy trading. The discipline itself runs 180 degrees against the satisfying emotions and denies them to the trader. That is one of the primary reasons that so many traders struggle with the emotional aspects of trading. It is the way that they are trading. They are trading in a manner that fuels their emotions, and establishing poor habits – both active and emotional habits. If they would focus on establishing healthy trading habits and practices, follow the established wisdoms and observe themselves in their trading, do the simple things that they are supposed to do, their emotions would not flare up so badly and they could begin to break the cycle.
Sure signs of a winner, and last chance…
I wanted to share with you what in my opinion is are a few
sure signs of a winner.
I received an email the other day and the message tells me
that this guy is destined to be a winning trader - period.
He is truly sincere about being successful.
Here is what he had to say:
“Brian-
I just signed up for the class. I am an experienced
trader, but I feel I need a fresh look at how I think about
trades.
I am a “student” of emotions in trading, which is how I
discovered your name. I noticed your book and followed it
to the site. I then received your email and felt the
course might offer a different perspective on trading than
others. After registering, you recommended we read your
book.
Is it included in the course or do we have to purchase it
separately?
Thanks”
Here are the signs:
1. Even though he is experienced, he is still looking to
get better. He isn’t smug or cocky and assuming that he’s
already “there”. He knows that there is room for
improvement and he is both open to it and is actively
pursuing it.
2. He has made the decision to BE a student - all highly
successful people are continually in learning mode.
3. Hi is sincere. You can tell by the way he talks. He
is not just caught up in being “serious” about making
money. He sincerely wants to better himself as a trader
and demonstrates this both in his words and in his actions
(signing up for the class).
4. He is investing in himself as the trader that runs his
trading business. It is just like if you were running a
business with employees. Would you just put them to work
and expect them to learn everything “on the job”? Or would
you invest the time and money in them to make sure they are
the best for your business that they can be?
5. He is looking for complimentary learning. Some people
only want to hear what agrees with what they already think.
Many great leaders will make certain that they are getting
different perspectives and not just surrounding themselves
with “yes-men”.
In my opinion this guy is destined for life-long success,
both as a trader and probably anything else he chooses to
pursue. A winner, no matter the endeavor.
Now with regards to his question, The Subtle Trap of
Trading is included with the class if you don’t already
have it. Glenn referred to it as the companion book for the
class.
And in case you forgot, the “Emotional Harmony in Trading”
course is included with the class. It is not completed
yet, but when it is released, class students will get it as
part of this class. Dealing with the emotions of trading
are going to be included in both, but the topic will be
approached from different perspectives. Plus, the class
does go quite a bit more in depth and covers additional
topics.
Are you sincere about making an improvement in YOUR
trading? If so, this is your last chance to enroll in this
class. Today at midnight is the final deadline, so now is
the time.
http://www.insideouttrading.com/eclass/
If you are still “on the fence” about whether you should do
this, and you have a question or concern that hasn’t been
addressed in the audios and videos that I’ve sent you, feel
free to send them to me or pick up the phone and call me at
(866) 279-6065.
That’s all for now. Time to get ready for class!
Cheers!
Brian
P.S. Another reminder. The class is guaranteed. If you
feel after taking the class that you haven’t benefitted by
the amount of the tuition, then let me know and I’ll gladly
refund your money. I am that confident that I can help you
make a very positive difference in your trading.
http://www.insideouttrading.com/eclass/
A couple of short videos for you
It’s Saturday and I’ve got a couple short videos for you.
An update on ‘Building a Rock-Solid Trading Foundation’
http://www.youtube.com/watch?v=O53nVkBfYXk
and
The right focus for successful trading
http://www.youtube.com/watch?v=73gC27XSdXg
I’ll have another one soon for you where I explain how the
Zeigarnick effect impacts traders.
Talk to you soon,
Brian
P.S. tomorrow, Sunday at midnight eastern time is the deadline
for getting in on the eclass, and there are still a few seats left.
http://www.insideouttrading.com/eclass/
Your Questions Answered by Glenn, and an update
I know that you’ve considered signing up for the class, and you
very likely still have a few concerns or questions.
Rather than me answering those questions, I figured who better
than a past student. So I called Glenn Martin from Colorado and
left him a message that there were some questions about the
class and asked if he would give his candid feedback (good or bad).
I didn’t tell him the questions ahead of time, because I wanted to hear
his first response. The recording only takes a few minutes and you
can listen to the recording of Glenn answering your questions here,
http://www.insideouttrading.com/eclass/student-answers-your-questions.html
On that page I went ahead and listed out the questions I asked him for
your convenience, so you can see if you had any of these questions.
——————————————————————-
Regarding the update, yesterday was busier than expected and we are on
pace to have the class filled by the deadline of Sunday midnight eastern.
I am only looking for people that are sincere about becoming better traders
for this class.
The focus is not on trading, but you as a trader. My philosophy and approach
is that helping you become a better trader is the best way to improve your
trading experience and results. If this sounds or feels right to you, then you
need to trust your ‘gut’ and act.
http://www.insideouttrading.com/eclass/
Happy Friday! (aren’t Friday’s just wonderful?)
Brian
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