Why Most Traders Lose
One way to change from a losing trader to a winning trader is to change the thoughts that preceded the actions responsible for the losses. It is difficult to alter the habitual thought processes that have embedded themselves deeply in a trader’s personality over a number of years, due to the powerful influence of three intertwined emotions: fear, anger and guilt.
Fear is an emotional state of anxiety due to the presence or perceived presence of danger. (Stress is often defined as anxiety from an unknown source.) Each newborn child has only two natural fears- fear of loud noises, and fear of falling. Most fears produce learned behavior to a specific set of conditions, called conditional responses. Pavlov pioneered this research with dogs in the 1920’s, then B.F. Skinner with human beings and animals in modern times.
Fear often impairs the rational trade decision-making process by emotionally relating the possibility of past financial losses to the future. Fear often immobilizes the trader’s decision-making process resulting in no trading decision, or a delayed incorrect trading decision response.
Fear will elicit a trader’s “flight or fight” response when he is confronted with methodology’s trading signals. The trader will either take actions as demanded by his trading methodology, or remove himself from the presence of danger. An acronym for Fear may be “false evidence appearing real.”
Attitudes determine actions -
Traders with positive attitudes have positive expectations, and take decisive goal-directed trading actions despite fear.
The winning trader accepts the possibility of losses or mistakes yet has the self-confidence to take action despite fear. Winners manage fear, and losing traders are controlled by it. The greatest mistake is to fear making a mistake. Trading success is based on knowledge of what works and what fails. Managing fear and accepting mistakes are an essential part of the trading educational experience that makes success possible. Winning traders learn from mistakes, losing traders repeat them.
Self-confidence naturally develops from self-discipline as a trader learns what actions should be taken from a given set of technical conditions. The more accurately a trader interprets price action, the better his trading results should be. Thought precedes both emotion and action, yet thoughts combined with emotions determine actions. Self-confidence comes from believing in one’s abilities, assessing and accepting risk, then taking actions. The winning trader knows personal or financial growth is impossible without risk assumption, which is part of an educational process.
Only emotionally healthy traders can adequately assume risks, because losses must be emotionally and financially acceptable to each individual trader. Each trader must define their own thresholds of pain for each, and develop the self-confidence to accept them. Fear of being wrong may be more important to a trader’s ego than fear of sustaining a financial loss.
In a similar manner, many traders can’t accept financial success, because it does not conform to their negative self-image as a losing trader. There are various ways fear can be creatively used for financial destruction by the losing trader, but the one common denominator is allowing fear to control trading actions.
It is important to analyze fear and determine its origin to learn why it is being experienced. Most fear is based on irrational beliefs adopted years ago. If fear of losing money is causing anxiety or loss of self-esteem, the trader may wish to simply stop trading until this fear is understood and positively accepted as part of the trading experience. Traders should never borrow money to trade, or risk money they cannot afford to lose.