I usually refuse to cut losing trades. How can I modify that?

Posted By Scott Philips On Wednesday, December 21st, 2016 With 0 Comments

Great question! And it’s been the ruin of many a poor boy. Let’s go a little deeper and think about WHY cutting trades is hard.

Our limbic system is wired for a caveman style existence. Perfectly adapted for hunting the sabre tooth tiger and fighting with rival tribes, but for navigating complex financial markets… not so much.

The things that make us the apex predators of the whole world, virtually guarantee that we suck at trading. Our brain interprets a losing trade as potentially life threatening, it gives us disproportionate amounts of stress.

Let’s be clear. What IS important is the next 1000 trades, and the positive expectancy of your trading ruleset or system, and trading that ruleset well. What is NOT important is the result of the next trade. But still, losing trades HURT.

Losing trades hurt like a punch in the face. You only have to admit to yourself that the trade is lost when you exit, so by refusing to exit a trade you are keeping alive the possibility, however small, that you will be saved.

Fundamentally this is an unwillingness to experience a negative emotion. This is not that different from the alcoholic who uses alcohol to escape from feelings (and there is often a crossover between substance abuse and bad trading). It’s not that different from codependence, or a bunch of other psychological problems. This is probably best explored in psychotherapy with an actual professional, I can guarantee that until you are willing to take the pain, you will lose in the markets.

The most important thing I know about the financial markets is that I am willing to take a loss. Until you are willing to lose well, and be proud of that, you cannot win. My win rate this year was 51%, I lost money in over 100 trades. My average losing trade was for 1.6 million US dollars. I had a losing trade today, and by cutting my losses it cost me only $14000 USD. I am up 48% for the Australian financial year (ending 30 June 2016). Win rate is the least important factor in successful trading.

In a practical sense, you should ALWAYS use hard stop losses in the markets. It is very difficult to make decisions on the fly under pressure, always best to have those decisions made from the cool logical place before you enter a trade, rather than in the middle of the trade when emotions are running high.

You MUST make friends with your emotions. Some trading gurus insist that you be like a trading robot, emotionless and cold. This doesn’t work, and most of those guys have never traded successfully.

When you are afraid of taking a loss you are afraid of feeling shame.

“Those who are winning to feel shame rarely have to” – Ed Seykota

How do professional traders enjoy their work if they are not allowed to be emotionally attached to gains and losses?

As I understand it’s a red flag for hedge funds if a trader is emotional about gains and losses. They want a person with cold mind and being able to make rational decisions under high pressure. It’s not clear how they enjoy their work if they can not be excited about their successful trades.

For me the point is not to deny any of my emotions. But happy with winning trades, and sad about losing trades, are two sides of the same shitty coin.

For me the gold standard of trading psychology is to feel and acknowledge every emotion that arises from it. Most aberrant trading decisions in my experience are a result of refusal to experience the feeling, whether that feeling is fear of loss, shame, powerlessness, etc.

If you are totally willing to feel any emotion, you just feel it, acknowledge it, and move on. Emotions lose their power to fuck with your decisions.

You reframe a “win” from “I made X$ or Y%” to “I traded with high skill today according to my method”. Like any professional, you become PROCESS driven rather than RESULT driven.

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