35. Master the Psychology of Trading: The Effect of Losses

http://www.informedtrades.com/
A lesson on how the ability and willingness to take losses when trading the forex, futures, or stock markets is one of the key factors that differentiates successful traders from unsuccessful ones.

Trading Success Means Comfort with Being Wrong

In our last lesson we introduced the concept that money management and the psychology of money management as the most overlooked but most important component of trading success. In today's lesson we will begin to look at one of the most important components of the psychology of money management: a willingness to be wrong.

Humans in general grow up being taught by their environment of the importance of always being right. Those who are right are envied as the winners in society and those who are wrong are cast aside as losers. A fear of being wrong and the need to always be right will hold you back in general, but will be deadly in your trading.

With this in mind lets say that you have been watching my videos and feel that I am an intelligent trader, so you want me to give you a method to trade. I say fine and give you a method and tell you that the method will trade 100 times a year with an average profit of 100 points for winning trades and an average loss of 20 points for loosing trades. You say great and take the system home to give it a try.

A few days later the first trade comes and quickly hits its profit target of 80 points. Great you say and call a bunch of your friends to tell them about the great system you've found. Then a few days later the next trade comes but quickly takes a loss. You hold tight however and then the next trade comes, and the next trade etc until the trade has hit 5 losers in a row and amounting to 100 points in loses on the losers so you are now down 20 points overall, and all your trader buddy's who started following the system after the first trade are now down 100 points.




Now you feel really dumb and are the joke among the group of guys that you trade with, so the next day you come back to me yelling about how bad the system I gave you is. I say ok and tell you I have another system for you. This one also trades 100 times a year but has a higher success rate that I think he will be happy with. You take this system home and the next day it quickly hits a winner followed by another then another and then another until over the next few days you have 5 winners in a row totaling 50 points in gains for your account. Getting very excited you call all of your trader friends and tell them that this time you have found it, you tell your wife how you haven't lost on a trade in two weeks and you rub your perfect trading statement in the face of all your trader buds as revenge.




So now ask yourself this question. If you were really the trader in this example which system would you rather have? I can tell you from experience that the large majority of traders will take the second system without a second thought, and on top of that will stick with it even if it hits a few losses that wipe out most or all of its gains.

Although the successful trader will want to know a lot more about both these systems which we are going to learn about in the lessons that come before deciding which one to trade I can tell you that what they will glean from the above information is the following:

Category:

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• investing
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• informedtrades

[rbonilla18]

Dave, how much pips do you recommend as the stop loss point????. I used to trade @ 3 pips per transaction but after seen your video. I'm giving a long pips profit a chance over 50 pips per transaction. Whats your view on short transaction. Thank you, keep the good work.

[InformedTrades]

Hi rbonilla18, Glad to hear from you. There really is not one right answer for what is the correct stop loss level as this depends on your trading style, money management strategy, and what is going on in the market when you place your trade. I do however cover different strategies for placing stop losses in the videos that follow this one. Best Regards, Dave

[zencv]

i learned this lesson for €5000. All it took was 3 losses to blow my account.

[InformedTrades]

hi zencv, sorry to hear that it happens to the best of us. Best Regards, Dave

[mattymac12345]

Dave thank for your video The area that im coming up short is in the Psychology. I have been trading for 6 month and i seem to have the fear i am goin lose what i have already made.

I have read the psychology book and by the end of it all it looks like is words on a page. Your video has helped me so much. Before i start my night i watch your video and it getting me on track. Books are all good but when you can visually see something and someone explaining it too you it help so much more

Matt

[chess1302]

I only have to disagree with the absolut way you are putting this subject, as if the system 1 were more likely to be profitable than the system 2. The best system is actually a hybrid between this two systems.

[2011bilaal]

lose is good thing..

[hailkayy]

What's the point of this video i didnt learn nothing at all just heard a promotion of a website, jeez all that story for nothing LOL That's a Joke

[mrhuge815]

I strongly suggest spending as long as possible using simulated money to develop the mindset needed to be a successful trader. Set a strict set of rules for losses(lost $500 and out for the day) and profits(made $1000 and out for the day) and always completing a checklist before EVERY entry despite the urge to 'get in'. There is nothing worse than jumping into a trade and then realizing its not all you thought it was.

[DayTradersWin]

I like your video - subscribe to my channel and friend to have day trade videos

[MikefromMadrid]

@zencv you over leveraged fool

[gogo12able]

hey Dave awesome videos i was looking for something like this to educate myself and this is perfect , you are like a teacher! very simple lessons and i been learning so much and i open already a micro to start trading and these videos are helping to improve everytime i need info i just come here or your chanel and the forex daily. keep it up and thanks God bless you !