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Trading Markets Trap #1 Failure to Preserve Financial and Neuropsychiatric Capital

InvestorEducation / Learn to Trade Nov 11, 2008 - 05:34 AM GMT

By: Dr_Janice_Dorn

InvestorEducation

Best Financial Markets Analysis ArticleWHY YOU WIN AND WHY YOU LOSE: TRADING TRAPS AND HOW TO GET OUT OF THEM

Estimates are that 75-95% of all traders lose all their trading capital in the first year, and only about 5-10% of those that get into trading are able to stay profitable on a consistent basis after 5 years. This is not encouraging. However, since the majority of people tend to be overconfident, most believe that they are not going to be among the casualties.


What is behind this overconfidence?

Some of the most highly educated professionals such as doctors, lawyers and engineers who are used to being first in their class--the best of breed in whatever they do-- fail miserably as traders and investors. The reason is that the process of trading and investing is completely different from activities and ways of thinking that bring success outside of the markets. Trading is a counterintuitive to what we are taught growing up. As we grow and develop, we acquire levels of control. We learn to control our bodies, movements, environments, who we chose as friends, lovers and mates, our educational goals, where and how we live. We get cozy and comfortable in our little worlds where we make the rules, and live out

our lives in accord with them. Yes, there is a lot going on in the world, but it really doesn't mean all that much unless it affects us directly. When external challenges face us in our personal lives, we take control, problem solve, and get done what needs to be done.

In the markets things are quite different. There is no way to control the market forces. Markets are larger than life, yet they are life. Millions of people from every part of the world are there making decisions that affect you in either a positive or a negative fashion. Millions of nameless and faceless people are trying to take your money before you take theirs. There is no situation in the life of most people that compares with this. That is why successful trading and investing requires one to adopt an entirely new brain-set.

The majority of people are simply not neurologically flexible enough adapt to this new environment. They insist on adapting the markets to their own worldview, and they fail—sometimes miserably so.

It is anathema for many highly educated and extremely intelligent people to hear that they might be programmed to lose , are sabotaging themselves or might have a subconscious desire to lose. We know differently because we see it all day every day.

We have learned that the markets speak to us and tell us many things about ourselves. They expose every single aspect of our personality, whether we like it or not. If we open ourselves to receive the messages from the markets, we will understand ourselves as never before. If we remain rigid, stuck in linear or closed-minded thinking, then we are well-served to keep our day jobs and stay out of the markets. If we are willing to be flexible and adopt a non-linear mindset and become comfortable with uncertainty, we have a good chance to be successful.

In our time and culture, the battlefield of life is money. Instead of horses and chariots, guns and fortresses, there are banks, credit cards, mortgages, salaries and tax authorities. But the inner enemies remain the same now as they were in ancient India or feudal Japan: fear, self-deception, vanity, egoism, wishful thinking, tension and violence… Jacob Needleman

The greatest source of failure in trading and investing is loss of capital. Lose it and you are out of the game. If you lose your money, you have to go out and find more money to put into your trading account. That may or may not be throwing good money after bad. If you lose your emotional stability, you have to go out and find ways (we are talking money here because therapy is not cheap and neither are psychiatric meds) to get it back. In either case, you will need to leave the markets for a while and get your financial and emotional act together.

This takes a toll, gets you out of the market flow and inflicts damage to you in ways that may not be immediately obvious. Faced with large drawdowns or wipeouts, many people become both emotionally and physically ill-- and this carries over to their families and loved ones. What begins as a financial loss turns into actual biochemical changes in the brain. Losing money causes sadness, despair and anxiety. This leads to stress (sometimes called allostatic load) that causes buildup of inflammatory substances in your body. Systemic toxicity and sickness develop because your immune system is overloaded and cannot defend you from pathogens. It also leads to a variety of symptoms including those in the Diagram of Stress 101 to the right:

We have all heard heroic stories of traders that have gone through complete disaster, only to come back stronger than ever. Those who can be believed (caveat emptor!) are few in number. These are the true comeback kids. The rest are not so lucky, and just go quietly (or kicking and screaming) into the night, buried in shame and guilt and vowing never to return. (You might be surprised at how many come back only to fail again and again. Insanity is doing the same thing over and over and expecting different results)

Small losses almost always become larger and larger losses, leading to every manner of emotional distress as you are holding and hoping, or in complete denial that the position could possibly turn against you. Holding and hoping leads to larger losses and more emotional carnage until you are a financial and neuropsychiatric basket case and you just want out at any cost. Desperation, anxiety or depression set in and remind you of every time in your life you were told that you were not good enough, that you would never amount to anything or that you didn't deserve to win or be successful. You are now in a state where both financial and psychological capital are depleted--all because you didn't take a small loss.

How do you preserve your financial and psychological capital? You learn to embrace risk by using rigorous risk management techniques. The most important of these are position sizing, stops and money management. You take small losses. You take small losses! You let winning positions run and take profits and trail stops as they are running. Please memorize this until it is burned into the connections in your brain: The single biggest reason for failure as a trader or investor is the inability to take small losses and letting them grow into larger losses.

A few words about stress:

It is important to understand that some stress is good for you. It evolved as a survival mechanism. You get a rush of adrenaline and other chemicals when faced with a sudden life- threatening situation. You react faster, often without even thinking. Your strength can suddenly double for an instant. This flight or fight reaction is a basic survival mechanism hard wired into your brain from the days of the caveman. Get Your Trading Brain Out Of The Cave in our store

Now that we're civilized (at least technologically) we seldom face life threatening events. However, modern day life puts other pressures on us. Instead of being attacked by a wild animal, escaping and then relaxing for a week, we get stressed by the multiple processes of living in a complex world where technology is accelerating logarithmically and communication is almost instantaneous. Stressful situations can stay with us for days, weeks and even years, or they come to us in rapid succession such that we feel overwhelmed and helpless. Sometimes we feel that our lives are spinning out of control and we can't take it anymore. This chronic stress is what kills us instead of saving us.

We have written and spoken for years about how to manage chronic stress without dropping out and meditating in a cave on a mountaintop.

All you need to do is stop and get off the horse once in a while. Relaxation is not only fun and easy to do, but it will extend your life and help keep you from getting sick. Focus and intentional practice are much more effective than passive relaxation. You might try meditation, yoga, prayer, self-hypnosis, deep breathing exercises, creative visualization, biofeedback or tai chi. Stress management can measurably reverse much of your stress-induced damage very quickly. You can restore your depleted immune system in ninety days or less. Best of all, your benefits accumulate. The longer you practice stress management techniques, the healthier you become.

In the coming weeks, I will show you two simple stress-busting techniques that work like a charm with almost no time or effort. Plus, they are fun! They'll take you—in a manner of minutes-- from a dysfunctional, tied-up-in-a bundle-of-knots to the relaxed, happy and productive person you are meant. Until then, a picture might be worth a thousand words:


Photo credit: http://www.nursinged.com/

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 2006-08 -- 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

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