“Isuffered a series of severe losses, and to this day, I still can’t get it together.” In this quote, my investor friend described a difficult period he was going through. Life events had made him more stressed than usual, and, to make matters worse, a series of losses had occurred. As a result, he was unable to return to the market. Instead, he sat in front of the computer, looked at the signals, and could not open a trade.
During a later conversation, he took out a thick binder full of colourful printouts from the market.
– If I had joined the market today, I would have made a significant amount of money. I analyze the last few weeks and see how much I would already have in my account. My wife laughs at me for becoming a demo investor. She has already accepted that I sit in front of the screen for hours and do not trade.
This story has a reasonably neutral ending. The standard of living and family remained intact. The investor was left with ample capital to live comfortably, dating back to his days as a small consulting company owner and CEO. However, the inability to return to the market is a disaster for many investors, forcing them to look for another income source.
Other stories end even worse. Much worse. Investors lose assets (sometimes not their own), embezzle company money, lose their homes (bank loan against collateral). Some fall into alcoholism and drugs or even develop psychological problems. Those who carry emotional issues into the family lead to breakups and suffering.
In other cases, symptoms of post-traumatic stress disorder appear, which can last for years, turning life into hell. In many of the situations described, further trading can be forgotten.
The issue of losses and reactions to them is severe, especially since there are no good sources of solutions that would be able to stop the problem or reverse it at all.
What do the best investors do differently?
To tackle the problem a few years ago, I started asking myself questions while researching top investors. How do they cope with losses, what methods do they use, what has allowed them to survive so long without adverse side effects? Long-term and systematic gains are certainly some guarantee that these people can cope.
While researching the best traders, we discovered several reasons. First, some of them reached the top due to the different approaches to the system and the way they trade. In contrast, others use unusual psychological techniques in their work.
Let’s start with the “system” part of the most important problems that lead to losses on the market
According to the research, the best traders approach the system and its results entirely differently.
Their systems are well prepared and tested, mainly due to many years of experience in the market. Being well prepared means less stress, less intense psychological reactions during the game, more resistance to unfavourable course of events, conviction or knowledge that despite difficulties and losses, everything will end well.
They perceive the purpose of the system and the result of a single order differently. Here the traders are fundamentally different from others. They know that the outcome of a single order is unknown. Therefore they do not get attached to it. They also know from experience that, e.g. at the end of the month, they will come out on top nonetheless.
The fundamental uncertainty of what the market will do means that they do not risk a fraction of their account, hence the high margin of safety. Thanks to it, they will be able to ” trade back” many times. If they risk more (sometimes much more), they know very well why it is worth it. They do not make decisions on the spur of the moment. The opportunities they hunt for are excellent indeed.
They know the efficiency of their system and the maximum sequence of losses that can happen to them. Understanding the “worst possible variant” is reassuring; being mentally prepared, we can better withstand a series of losses. For beginners or unprepared traders, the element of surprise increases the reaction force. Subsequent losses only increase the reaction force.
While being with a position on the market, traders do not think about its size. Therefore, they do not treat it as “money”. “Think about points, not money” – as one billionaire trader says.
Some psychological recommendations…
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