Many successful traders take a systematic approach to trading. They start with a hypothesis about the market or certain economic conditions. They follow up the hypothesis by creating a trading plan, and then they finalize the process by placing a trade to test their position. It’s very step 1, step 2, and so on.
Sometimes a plan is on the money and the result is…. Money! The hypothesis and trading plan worked out at the given moment and the end product is a success trade. Probably more often, though, the hypothesis and supporting trading plan are off mark, and things are reversed.
No money! Actually, less money!
At this point, modifications to the trading plan (or even the original hypothesis) are needed. We always want to know what we didn’t do right, or identify anything we overlooked or didn’t take into consideration, and then try again. Of course this has to be done with as little emotion as possible, or else we start to feel like the eternal pessimist:
“What am I doing? I’m always wrong; never right. This should have worked!”
It’s easy to start thinking like this, especially for novice traders and beginners, who tend to wear emotion on their sleeve. Even the most cheerful, blubbliest, sunshine loving, professional optimist would start doubting herself. After pessimism has swallowed her body whole, the only logical products to follow are denial, hopelessness and a craving to make right, right now! And when we mix emotion and trading, the only outcome is loss.
What you want to do when things haven’t gone your way is imagine the other side of the fence, imagine the glass half full, and imagine that things will more likely go well than badly.
Example: I lost $10,000 on my last trade meant for my son’s college education! Look on the brighter side – Stanford is out of the question, but the local community college is perfect! I’m saving money and my son will more than likely live at home, under my watch at all times.
Okay, maybe that’s not the most realistic or best example for this situation, but it’s a possibility. Just remember: It works to think positively and like an optimist. And sometimes thinking positively means thinking how things could have gone worse.
Example: I lost $10,000 on my last trade meant for my son’s college education! Luckily, my teenaged daughter’s ever-ringing cell phone/handily woke me up in time for me to close my losing position. I would have lost $30,000 by the end of the trading day!
Now that’s a way to think optimistically. Sure you lost $10K, but it could have been three times worse. Research shows that those who focused more on the how things could have been much worse during a setback actually felt better about the situation than those who contemplated on how things could have turned out better. Crazy!
Your recovery from a setback is directly related to how you view the setback when it happens. If the event is viewed as a total lose or end of the world occurrence, there’s a pretty good chance that emotion will overpower you. As you read above, too much emotion intermingling with you trading can lead to despair and hopelessness, and a feeling to regain your loses immediately.
Bad idea! Stay away and calm yourself first! Rather than jumping right back into the swing of things, take time to grasp the situation. Step back and relax. You need to rejuvenate your psychological juices before getting back to trading.
Take the setbacks as learning experiences. Dissect your errors to find what went wrong and rework your strategy with the necessary changes. Find out what needs improving to make the profits rather than crossing your fingers and wishing upon a star.
It’s so easy to fall apart and doubt your progress when your “bullet proof” trading plan doesn’t return profits. Dwelling on what could have been will only frustrate and dishearten you to continuing in your quest for pip gains. Your job, if you chose to accept it (and you must!), is to be the ultimate optimist, the overoptimist. Keep your focus on solving the problems that keep you from profits, and don’t dwell on the mistakes. Think systematically and unemotionally. Take your future trade as just another problem to solve. If it doesn’t work out the first time, take the high road, and fix what needs fixing. Don’t doubt your hard work, even if it doesn’t produce results. Each failure and mistake is another learning block for you to tuck away in your “experience bag.” Think happy, think sunshine, smile. Your trading will reflect your positive attitude.
Learn how to build a trading plan in our School of Pipsology.
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