Trading Psychology · 2023-09-28

Trading Psychology — Trading Out of Control

If you have traded long enough, I think you have also gone through crazy, out-of-control trading streaks. Only when you have lost too much, blown your account, do you suddenly wake up and realise what you have done. At that point, the feeling is truly shocked, mixed with disappointment. You feel guilty, you feel you have lost faith in yourself. I think that cycle repeats many times; let us find a solution to this problem together.

I think the content of this article is quite new, and it is written about the issue of trading psychology. Please read slowly or save it to your device to ponder. Because it is very hard to understand fully on the first read.

CAUSES OF OUT-OF-CONTROL TRADING

Go back to the time before you lost control or overtraded. At this point, you are a trader with a trading plan and you follow that plan. A series of trades with losses and wins, but you still have a profit.

You are very confident in your trading; you trust your analyses. Sometimes, you even think you are the market, and you cannot be wrong.

Observe the image above: when your confidence is too high it becomes arrogance. And our ancestors often said: "An arrogant army is bound to be defeated". A clear example is Cao Cao losing the Battle of Red Cliffs. The cause is distilled from one thing: Cao's army had gone through too many victories, too easily. And they did not need to prepare anything more to win.

And now, you are in a series of winning trades. You think you are always right; at that point you do not need rules or trading plans. You simply need to look at the chart and see a trading opportunity. At the same time, you are certain that your trade is a sure winner. You enter a trade with a larger volume than normal; after this trade you will have a large profit. That is for sure.

And you enter a trade as in the image above. You entered at a very beautiful position and price almost immediately went up. If this trade succeeds you will have 6R (profit / risk ratio). Price nearly touches the take profit point but jerks sharply down and touches your stop loss point. You are taken out with a small loss; you seem a little regretful about that. But right after that, price bounces back up and reaches your previous take profit point. You have been taken out of a profitable trade.

SO WHERE DID YOU GO WRONG WHEN TRADING

Right at this moment, you feel very angry. Exactly — you should have had a large profit and now it has become a loss instead. So who are you angry at? You blame the market for playing a trick on you. And of course, you want to take revenge on the market.

In reality, if this losing trade were in a period when your confidence was not yet high, you would completely accept that loss, and you would wait for a new opportunity with a higher probability to enter a trade. However, at present you are very confident and believe that you must be right and win all your trades. The trade just now is a domino, causing right after that for you to enter a trade with a large volume. The next trade has no preparation; you enter a trade based on emotion and the probability of winning is not high.

And when this next trade loses, you enter even more trades. It continues until your losses exceed your tolerance. Or, at worst, you blow your account and become discouraged with the job of trading.

Of course you were wrong! The fault is not the market's. You were wrong because you were overconfident; you were wrong because you believed your emotions. If your trading rules and principles brought you a series of profitable trades, you should trust and follow them. But then, you thought that was due to your own ability, or, craziest of all, you thought you were the market. That is exactly what makes you not follow your principles and leads to entering low-probability trades.

ESCAPING OUT-OF-CONTROL TRADING

The question is whether there is a way to improve that! The answer is yes! Learn from the lottery and numbers-game operators! I am serious!

We will not discuss the illegal aspect of it. I only want to consider another aspect and find a solution to the problem we are facing.

Those lottery and numbers-game bookmakers create a game in which, in the long term, they will win. You choose one number and if you choose correctly, you will receive 70 times the amount of money you bet. I suppose you choose all 100 numbers from 00 to 99; at this point you are sure to guess 1 number correctly, but you lose 100k to choose 100 numbers and receive back 70k. The edge is not in your favour. Looked at more broadly, every day there are 100 people participating in betting over the course of 30 days.

With a large enough sample size (the number of participants & the number of days), the lottery bookmaker always has a profit. They do not need to know whether today someone wins or loses; they only care about maintaining their edge and their rules. In the long term, they will always be the winner.

TRADING ACCORDING TO PROBABILITY

In trading it is the same: build yourself a mindset about probability. You have a good, proven trading method. And build rules and principles about risk management. You trust that when you follow the principles and carry out the trading method, in the long term you will have a profit. This is a very difficult mindset to build. Why? Because it means you must accept that your current trade can win or lose. You do not know whether the current trade or the next trade is a winner or a loser.

You have 10-20 trades a month; you believe that after that series of trades you will have a profit. At the same time you must also believe that you do not know the order of which trades are profitable or losing. Just like the numbers-game bookmaker, they do not know which customer chose the right or wrong number; they accept them all. That means you have a trading signal according to your method; you enter a trade and do not need to care whether it wins or loses. This goes against human psychology!

That is also exactly why we always want the current trade to be a winner. That is a mistake in trading. But if you change your perspective and do not expect anything from one specific trade — you only expect to correctly execute trades according to your method — I believe you will be able to earn a regular profit from the job of trading.

CONCLUSION

As I often say, trading is a job designed to go against human psychology. That is precisely why the number of successful people in the job of trading is always very low. And that minority usually fails and learns. After that there is a leap in belief and psychology toward the job of trading. I hope that with a little sharing from me personally and what I have experienced and learned, it will help you in some way.

Trading is a journey, not a destination.

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