A trader of means will tell you that the secret of their success is trading scientifically. First, they must form a hypothesis. From there, they formulate a trading plan and execute it. After that, they have to patiently wait to view the outcome.
Once they receive the outcome they can then determine if the theory and trading plan worked (or didn’t work) given a certain market condition. If the hypothesis and plan did not produce a profitable outcome, it is back to the drawing board to test yet another hypothesis. This must be performed scientifically, which means that one must remain emotionally detached.
Remain Personally Detached
Remaining personally detached can be difficult when tearing each strategy apart one-by-one. It is at times like these where a pessimistic outlook may take hold. You may find yourself thinking, "The situation isn't looking very good. If I had worked the plan this way, it would have turned out differently". This outlook can make even the most laid back, optimistic individual feel despairing. Denial is often used as a coping mechanism when dealing with feelings of despair and hopelessness. These emotions often cloud one’s vision and lead to trading impulsively and irrationally. Losses usually result.
Looking on the Bright Side: Countering Feelings of Hopelessness
How can you counter the unfortunate feelings of hopelessness after a trading loss? This may sound like a cliché, but looking on the bright side has been scientifically shown to have a positive affect! Although it does not turn losses into gains, it can help to "lighten the load" when feeling particularly defeated after a loss, or possibly a string of losses.
Dr. Chris Davis, a psychology professor at Carleton University, and his colleagues performed a study on the usefulness of thinking on the positives instead of the negatives after a trading loss. They had subjects/participants imagine that they just experienced a loss in the trade arena. Some of the participants were encouraged to imagine how this situation could have been worse. Others were instructed to think on how the situation could have been better.
The mood of each group of subjects was then measured. It is not surprising that the mood of those who were asked to "look on the bright side" was considerably more positive than those who were instructed to do just the opposite. If you have experienced a setback, think on the positives or how the situation could have been far worse. This may hinder a pessimistic outlook from taking hold after a trading loss.
How You View a Setback Can Determine How Quickly You Recover From It
The way that you view a setback is strongly correlated to how quickly you will rebound from it. It is imperative that you not take a loss personally. This often leads to denial and avoidance as you cope with your negative emotions. Negativity does not lend itself to positive change or decisive action, which is absolutely necessary to recoup your losses after a setback. How do you recover? Realize that losses occur to even the most successful and seasoned professionals. Take the loss in stride and carefully think out each trade. However, without taking action, you cannot move forward.
When you scrutinize each trade to see where it went wrong, it is easy to have it take on personal significance. It was something you did that caused the mishap. Therefore, something is wrong with you. If you step back and take the time to view the situation realistically, you may find that the loss was due to an unexpected downturn in a particular business sector. This would be a situation that you have no control over.
Losses happen, period. It is not an indicator of a character flaw or does it mean that you will not see profits on your next trade. Negativity detracts from the needed ability to focus and think scientifically. These abilities are what will help you to succeed in the trading arena. Take a moment to look on the bright side and optimistically search out winning alternatives to turn losses into gains.