Are you Trading Not to Lose

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The Problem of “Trading Not to Lose” and Overcoming It

Trading not to lose is an issue almost every trader will face at some point in their trading career. Learn why trading with fear can cause a host of problems, then learn how to better handle that fear so you are making better trading decisions.

I was recently reading one of Doyle Brunson’s books–he’s a no limit hold ’em poker legend–where he talks about this issue in the poker world. In order to be a great poker player you need to be opportunity seeking, and not afraid to put your money at risk when there are opportunities to exploit your edge. Ultimately, great traders, athletes, poker players, or anyone at the top of their field, share one similar trait: they aren’t afraid to lose. They go after it, have a killer instinct, and want to take every opportunity they can to implement what they have practiced and studied.

Trading not to lose causes major problems for traders. Here’s what it is, why it’s problematic, and how to get yourself into an opportunity seeking mindset.

Trading Not to Lose is Fear-Based Trading

As traders, we want to respect the market, but not fear it. It’s neither our ally nor our enemy; it’s a neutral sea of both potential and risk. Trading out of fear means we are too focused on the risk, and are unlikely to capitalize fully on the potential.

Trading not to lose, which is fear based, can cause the following symptoms (some or all) to develop:

  • You try to guess which of your trading signals are likely to be winners in an attempt to avoid the losing trades. By skipping signals you move away from your tested trading plan and strategies, and randomize your results. This is known as “trying to outwit” your trading plan.
  • Losses aren’t taken when the stop loss level is reached. The loss is allowed to run, resulting in bigger losses than planned. Fear is a tricky thing in that it can cause us to get more of the very thing we are trying to avoid. When we are afraid to take a loss–because we haven’t fully accepted that losses are a natural and regular occurrence in trading–we may actually try to avoid taking losses and thus run our accounts into the ground. This is an element of “loss aversion.” It’s important to understand, on a belief level, that losses are part of trading. They can’t be avoided, and trying to avoid them may actually cause more damage.
  • Trades are not allowed to develop. Contrary to the problem above, the trader is afraid of any sort of loss, or of a small winning trade turning into a loss. The trader knows the market gyrates back and forth, but they are “jittery” and therefore don’t allow their winning trades to compensate them for the risk they are taking. The trader continually gets out of trades at a small loss or profit even though their stop loss is in no danger of being hit at that moment, and the price hasn’t reached their target.
  • In general, fear can cloud judgment. In real-time, the trader may be so afraid to lose they don’t even see opportunities occurring. If you continually see trades (that you should have taken based on your trading plan) only in hindsight, fear may be causing you to actually filter out information and cloud your perception.

These are symptoms of trading not lose. Trading not to lose is a product of focusing on whether we win or whether we lose. But winning or losing actually shouldn’t be our focus.

As traders, it’s our job to come up with (or learn) strategies, develop a trading plan, and then rigorously test that plan for profitability and our ability to personally implement the plan.

Once we have a plan, our goal is to trade according to that proven plan. The plan is researched, backtested and/or traded in a demo account, and then traded live with small amounts of capital until the plan is proven successful. Wins and losses take care of themselves. While we are trading we can’t care about wins and losses…we only care about following our plan and trading every valid opportunity our trading plan gives us.

When we aren’t trading that is when we can look at our wins, losses, profitability, and trading stats to possibly make adjustments if needed to the plan. But this doesn’t occur during trading; while trading and holding positions our focus is only implementing our plan.

This is easier said than done, but understanding and accepting the following will help.

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Believe in Probabilities

While winning is the ambition of traders, “not losing” actually ends up being the dominant factor that affects trader’s decisions. This is because it is very easy to have knowledge of risk, but it is something entirely different to believe you can overcome it. This requires an internal “belief” change, not just knowing that a change is required.

In an effort to not lose the aforementioned symptoms develop, resulting in the trader losing their capital. How can we change our mindset to help avert this?

Consider “the house” or casino in a game of blackjack. Each trade you make represents a hand of blackjack. There is the house (a buyer or seller), and there is the gambler (a buyer or seller on the other side of the trade). The difference between them is that the casino owner has a percentage edge over the gambler. Disciplined traders also have an edge, and can therefore be equated to the house or casino owner.

While playing blackjack have you ever seen a casino owner run downstairs to stop a hand of blackjack from occurring because he thinks he might lose on that hand? Never. Gambling regulations aside, casino owners actually want as many hands as possible to be played because they know they have an edge on each hand. Casino owners also know something else: each hand is independent of other hands. Anything can happen on a single hand! The casino owner knows we can’t predict which hand is going to make the house money and which is going to make the gambler money. All he knows is that each hand is independent–in that anything can happen on a particular hand–and that he has an edge over many hands.

Over a great many hands the casino holds a 3.5% to 4.5% advantage, varying based on house rules. While the casino may lose tons of hands, at the end of year they are likely to have made 3.5% to 4.5% on all the bets placed at their blackjack tables. The more bets placed, the more the edge is exploited, the more profit they make.

The bottom line is that traders need to adopt the “casino owner mindset,” realizing the result of each trade is unpredictable and therefore every valid trade, within the context of the trading plan, must be traded. Also, know that trades are independent of each other. While you may have a string of losses, that doesn’t mean there is something wrong. Allow your edge to play out over many trades. Trust your edge, as the casino does, that over the course of a week, month and year your edge will produce a profit. This assumes you have edge, which is why you need tested strategies.

No single trade matters to a pro trader. Whether it is a win or loss makes no difference. The only thing that matters is exploiting the edge and taking valid trades, because over the long run all those losses and wins will make the edge (profit) materialize. And the nice thing about trading is that traders can create a much larger edge than the casino has.

Reading or understanding this analogy won’t create any change in behavior, it needs to be incorporated into your belief structure for change to occur. Incorporate it into your belief structure by meditating on the concepts, write down notes and your thoughts related to it, so that it begins to seep into your brain, overtaking the current belief structures you have about the market which result in ‘trading not to lose’. Put notes beside your computer, and continually remind yourself to adopt the “casino owner mindset,” and all that it entails.

Final Word on Trading Not to Lose

Adopt the casino owner mindset. If you do so, you won’t care about whether you win or lose a trade. You will be more open to seeking opportunities. If your system is proven, over many trades you know you have an edge and profits will come. Take every valid signal you can, so your edge materializes. Think of it this way: if you know you can win 60% of the time by guessing heads on a coin flip you’d be trying to get as many people to bet you as possible. The same goes for trading. If you know you win about 60% (even 51% of the time, or 40% if you make more on your winners than you lose on your losers) of the time you should be taking every valid trade you can so you can exploit your probabilistic edge. If you try to figure out in advance which coin flips or trades will be winners and losers, you become the sucker.

For more on these topics, see the interview with Mark Douglas, trader and author of The Disciplined Trader and Trading in the Zone. His books are definitely worth the read, and that interview discusses some of the topics from those books.

If you want to improve your forex trading, check out my Forex Strategies Guide for Day and Swing Traders eBook.

Over 300 pages of Forex basics and 20+ Forex strategies for profiting in the 24-hours-a-day Forex market. This isn’t just an eBook, it’s a course to build your skill step by step.

Are you Trading Not to Lose?

There is a subtle distinction between successful and unsuccessful traders. Successful traders don’t operate out of a fear of losing, while amateurs do. Do you want to lose? Likely not, but this is the wrong mind frame for trading in the first place. Trading not to lose means you haven’t fully accepted the risk of trading. Here’s why trading from the mindset of “not to lose” causes problems for so many traders.

Fear Based Trading

Trading not to lose typically involves a fear of losing which translates into:

  • picking and choosing which trade signals to take (trying to outwit your trading system)
  • Letting a loss run beyond what it should
  • Not being able to fully capitalize on a move, and thus be adequately rewarded for risk (a problem with most binary options)

All these problems stem from one issue–being more concerned about whether you win or lose, than about simply following your plan.

Trading is Probabilities

Winning or losing is at the forefront of most novice trader’s minds. They desperately want to win, but even more so, they don’t want to lose. When you don’t want to lose, all the above problems develop. The main one (as it encompasses the others) being that by operating out of fear you don’t take all opportunities that market gives you based on your trading plan.

When you don’t take all the signals, or if you jump out of trades too early or hold them to long, you are no longer trading according to trading plan and therefore are likely to lose your capital over a great many trades. They very thing you didn’t want to happen, will happen. Why is this?

Think of a game of blackjack, except you are the casino, not the gambler. And each of your trades represents one hand of a blackjack. Have you ever seen a casino owner run downstairs from his office to stop a hand from going forward, or stopping a hand mid-deal in order to “bail out.” Of course not. Legality aside, casino owners realizes that one hand doesn’t matter. Each hand is independent of other hands, anything can happen on that one hand.

Over a great many hands though casino owners know they hold a 3.5% to 4.5% advantage (depending on house rules). So while they may lose many hands, at the end of year they are likely to have made 4.5% on all the bets placed at their blackjack tables.

Traders also need to adopt this mindset. They must completely let go of the outcome of individual trades. If they have a system that has been proven to win over a significant amount of history–whether they tested it themselves, bought it or learned it from someone else–they must trust that edge (like the casino’s 4.5%) and trust that it will come to fruition over a great many trades. One trade doesn’t matter. It doesn’t matter if you win or lose on it. If you are trading a proven winning system, over a great many trades you’ll win. As an added benefit, a good trading system can have a much greater edge than the casino has.

Most traders, while they try, can’t accept this when they go to apply it though. They let past winners and losers affect their judgement, when instead they just need to trade the signals happening now, and not worry about the past or the future.

Emulate the casino owner. They don’t care about whether they win or lose a hand at a table, even a lot of losses in a row typically don’t concern them. Over a great many days (trades) they know they have an edge. Your proven trading plan is your edge. Exploit that edge as often as you can based on the signals provided. Do this, and over time you will see that edge materialize, in profits, in your trading account. Try to guess which hands/trades will win or lose though, and you’ve just become the sucker on the other side of the table.

Reasons Why Forex Traders Lose Money

Michael Grabois/Getty Images

A commonly known fact is that most forex traders fail. In fact, it is estimated that 96 percent of forex traders lose money and end up quitting. The forex website DailyFX found that many forex traders do better than that, but new traders still have a tough timing gaining ground in this market. To help you make it into that elusive 4 percent of winning traders, the following list shows you some of the most common reasons why forex traders lose money.

Befriending the Market

The market is not something you beat, but something you understand and join when a trend is defined. At the same time, the market is something that can shake you out if you are trying to get too much from it with too little capital. Having the “beating the market” mindset often causes traders to trade too aggressively or go against trends, which is a sure recipe for disaster.

Low Start-Up Capital

Most currency traders start out looking for a way to get out of debt or to make easy money. It is common for forex marketers to encourage you to trade large lot sizes and trade using high leverage to generate large returns on a small amount of initial capital.

You must have some money to make some money, and it is possible for you to generate outstanding returns on limited capital in the short term. However, with only a small amount of capital and outsized risk because of too-high leverage, you will find yourself being emotional with each swing of the market’s ups and downs and jumping in and out and the worst times possible.

You can resolve this issue by never trading with a too-small amount of capital. This is a difficult problem to get around for someone that wants to start trading on a shoestring. $1,000 is a reasonable amount to start off with if you trade very small (micro lots or smaller). Otherwise, you are just setting yourself up for potential disaster.

Failure to Manage Risk

Risk management is key to survival as a forex trader as in life. You can be a very skilled trader and still be wiped out by poor risk management. Your number one job is not to make a profit, but rather to protect what you have. As your capital gets depleted, your ability to make a profit is lost.

To counteract this threat and implement good risk management, place stop-loss orders and move them once you have a reasonable profit. Use lot sizes that are reasonable compared to your account capital. Most of all, if a trade no longer makes sense, get out of it.

Giving in to Greed

Some traders feel that they need to squeeze every last pip out of a move in the market. There is money to be made in the forex markets every day. Trying to grab every last pip before a currency pair turns can cause you to hold positions too long and set you up to lose the profitable trade that you are trading.

The solution seems obvious here, just don’t be greedy. It’s fine to shoot for a reasonable profit but there are plenty of pips to go around. Currencies continue to move every day so there is no need to get that last pip; the next opportunity is right around the corner.

Indecisive Trading

Sometimes you might find yourself suffering from trading remorse. This happens when a trade that you open isn’t immediately profitable and you start saying to yourself that you picked the wrong direction. Then you close your trade and reverse it, only to see the market go back in the initial direction that you chose.

In this case, you need to pick a direction and stick with it. All that switching back and forth will just make you continually lose little bits of your account at a time until your investing capital is depleted.

Trying to Pick Tops or Bottoms

Many new traders try to pick turning points in currency pairs. They will place a trade on a pair, and as it keeps going in the wrong direction, they continue to add to their position being sure that it is about to turn around this time. If you trade this way, in the end, you end up with much more exposure than you planned, along with a terribly negative trade.

It’s best to trade with the trend. It’s not worth the bragging rights to know that you picked one bottom correctly out of 10 attempts. If you think the trend is going to change, and you want to take a trade in the new possible direction, wait for a confirmation on the trend change.

If you want to pick up a position at the bottom, pick up the bottom in an uptrend, not in a downtrend. If you want to open a position at the top, pick a top when the market’s making a corrective move higher, not an uptrend that’s part of a larger a downtrend.

Refusing to Be Wrong

Some trades just don’t work out. It is human nature to want to be right, but sometimes you just aren’t. As a trader, you just have to accept that you’re wrong sometimes and move on, instead of clinging to the idea of being right and ending up with a zero-balance trading account.

It is a difficult thing to do, but sometimes you just have to admit that you made a mistake. Either you entered the trade for the wrong reasons, or it just didn’t work out the way you planned it. Either way, the best thing to do is just admit the mistake, dump the trade, and move on to the next opportunity.

Buying a System

There are many so-called forex trading systems for sale on the internet. Some traders are out there looking for the ever-elusive 100-percent accurate forex trading system. They keep buying systems and trying them until finally giving up, deciding that there is no way to win.

As a new trader, you must accept that there is no such thing as a free lunch. Winning at forex trading takes work just like anything else. You can find success by building your own method, strategy, and system instead of buying worthless systems on the internet from less-than-reputable marketers.

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