Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

The Importance of Financial Market Traders Not Adding to Losing Positions

InvestorEducation / Learn to Trade Oct 02, 2009 - 04:29 PM GMT

By: Dr_Janice_Dorn

InvestorEducation

Best Financial Markets Analysis ArticleThe day was more or less like any other trading day...full of thrills, chills, panic, elation, some "high-fiving" and some "what is happening here?"
 
Then he appeared.  It was the first time I had seen him, but the look in his eyes was familiar.  It was not sad, not happy--- just empty.


What could I say? His face and the way he held his head and quietly handed me the notebook said it all.

The first words he spoke to me were: "I made one trade last year and I am in trouble."

That got my attention very quickly. One trade in 12 months and in trouble was quite a different story from the one I usually hear. This was not the typical tale of a trader who laments over the hundreds of trades made each year and the inability to understand why they did not work and his accounts were now in significant drawdown. 

“Why are you here about one trade?” 

He looked at me for a long time without speaking. 
 
“Well, it wasn't exactly one trade.  It kind of was one trade but I kept adding to it, so the trade just got larger and larger.  I kept doing options on the SPY until I had hundreds of them.  Hundreds of options on the SPY.” 

“So what happened?”

“Well, I knew what was going to happen.  I read my newsletters, followed the pundits and what they were saying and I had this trading system which I bought at a big seminar that kept telling me that things were about to turn around and if I just hung on, it would be OK.”

So, I said: “You were in a losing position and you kept adding?  Is that what happened?”

“Yes”, he mumbled quietly.
 
“And then what?”

“Well, after three months of adding and averaging down I was down so much that I couldn't take the loss, so I kept adding.”

“And then what?”  

“Well…finally, after I couldn't take it anymore, I closed everything out for a loss.”
 
“And how much loss would that be?”

His voice went very, very quiet. “It was 80% of my trading capital.”
 
“80% of your trading capital?”

“Yes.”
 
“And?”

“It was the worst thing that ever happened to me because I lost hundreds of thousands of dollars and now I am totally afraid to make a trade. “
 
“I have not traded for six months and I am absolutely gripped with fear.  Can you help me?”

“Well, I don't know if I can help you unless you are able to tell me what you did wrong?”

“What I did wrong?”

“Yes...what you did wrong?”

“I didn't get out when I SHOULD have?”

“Why not?”

“Because I didn't want to take the loss and I KNEW it would turn around, so I not only hung on but I kept adding.   I was absolutely convinced that I was right, and all of my indicators and the main guy I follow kept telling me that it was only a matter of time before the turnaround would come, and that I really wasn't at a loss unless I took it.  In other words, it was only on paper.”
 
“Only on paper?”

“Yes, it wasn't real because I didn't take it.”
 
“And then, when you finally took it?   Was it real then?”

“Well, yes.  Good Lord!   It was so real that my wife threatened to leave me, called me a reckless gambler and threw me out of the house for a week.”
 
“Not a good thing.” 
 
“No, not a good thing.”
 
“And then, what did you decide to do?”

“Well, at first I thought I could get even, you know, get back into the game and make back everything I lost.”

“And then?”

“I was in total paralysis, total fear and unable to trade. I still am.  I can't eat, don't sleep well, my marriage is on the rocks, I have no faith in myself and I think I am becoming paranoid about people in the market being out to get me.”
 
Needless to say, this individual was in major trading tilt.  What does that mean?  He was and is out of control.  He was blinded by his own belief that he was right and the market was wrong.  Despite glaring evidence to the contrary, he was unable to cut his losses.  Worse than that, he kept adding to a losing position.  He was trading on hope and belief and was blinded completely to the reality of price, which was staring him in the face every day.  With each passing day, his accounts were in increasing drawdown and he became more and more crippled with fear.  Additionally, his self-esteem was failing and he entered a phase of shame that then progressed to toxic shame.    He was paralyzed with fear and remains so to this day.
 
There are so many trading lessons here, the least of which is: no matter what one thinks, believes, hopes or prays, the markets can remain "irrational" longer than you can remain solvent.  This is among the most difficult lessons to learn, but it is now--and has been since the inception of trade--an eternal truth.
 
What happened here to put this man into tilt?   Market opinions held in the face of glaring evidence to the contrary are among the largest sources of trading gone wild.

I have seen this over and over again- the inability to change quickly from bullish to bearish is not rewarded.  Just as in life, inflexibility and resistance to change is not rewarded in the markets.  The most successful traders are those who can adjust quickly between bullish and bearish trends, and who are prepared to do this within the course of minutes to hours.

Adding to a losing position is another lesson learned here.  Unless your pockets are deeper than the ocean, you must cut losses short (and, of course, let winners run).  Not cutting losses short is a major root of tilt.  Why?  Because the trader becomes absolutely worn out by daily watching the weak position get weaker.  In the markets, as in life, the weak get weaker and the strong get stronger.  The daily demise of a losing position is among the most debilitating of all things that a trader faces.

What else went wrong here?   If there was a trading plan, it was not adhered to.  All the planning went out the window when the position did not "cooperate."

Why have a trading plan when you are unable or unwilling to follow it?   What's the point anyway?  Trading is a business and a trading plan is like a business plan.  If you deviate from it, you better have a really good fall-back position or your business will go bust.

A few of the many lessons to be learned from this story:

The market is always right--except at significant tops and significant bottoms.

Keep and open and flexible mind.  When in doubt, get out.

If you must have a guru, take him or her with many grains of salt

Do not add to losing positions.

Try every day to make yourself stronger, better and more integrated as a person.

Stay true to yourself.  Lying to yourself and others, and trading on hope and prayer do not work

Most importantly, accept and recognize that you are not perfect. You are human and are going to make mistakes.  Trading is the only profession where losing is actually winning.  BUT--- unless you accept mistakes as mistakes and learn from them, you will not progress and be upside down.  Unless you are able to get your trading brain out of the cave you will not accumulate regret.  It is only through the true acceptance of a mistake as a mistake that we accumulate regret. This is how we learn and grow as traders and human beings.

Until Next Time,
Good Trading and Brain On!

By Dr. Janice Dorn, MD, PhD
Prescriptions for Profits
www.thetradingdoctor.com

Signup for your risk-free subscription to the Trading Doctor Newsletter. If you are not completely satisfied that our newsletter is for you just let us know, via email, within 7 days of your subscription date and we'll immediatly refund your money.

© Copyright 2006-09 -- Janice Dorn, M.D., Ph.D. -- Ocean Ivory LLC

Dr. Janice Dorn is a graduate of the Albert Einstein College of Medicine, where she received her Ph.D. in Neuroanatomy. She did her postdoctoral work in Neurophysiology at the New York Medical College. She received her M.D. from La Universidad Autonoma de Ciudad Juarez, did one year of clinical clerkships in Phoenix, Arizona. and then completed a Neurology Internship at The University of New Mexico in Albuquerque. For the past twelve years, Dr. Dorn has focused her attention on trading, mentoring and commentary in the financial markets, with emphasis on Behavioral NeuroFinance, Mass NeuroPsychology, Trading NeuroPsychology, Futurism and Life Extension. A graduate of Coach University, she is a full time futures trader and trading coach.  Dr. Dorn is the author of over 300 publications, relating to Trading and Investing Neurouropsychology, Market Mass Neuropsychology, Behavioral Neurofinance, and Holistic Wellness and Longevity. 

Dr. Janice Dorn Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules