There are many subjects around Trading Psychology that I thought may be of interest to you and some may be more helpful than others. This challenge is one that I regularly come up against with my clients and so I wanted to offer my thoughts around this situation that every trader experiences, some much more than others.
The first thing that comes to my mind was a recent coaching session that I was having with a client when I asked him. “How affected are you by the previous trade?”
His answer was quite matter of fact “quite a lot”. He continued “For example, if I have a losing trade I will automatically reduce my size by half. So I have a six lot on, I lose money… I will then change my size to a three lot” (He is an oil trader). “But this is going to take me longer and be more difficult for me to make my money back”.
As I quizzically looked on, he said that the problem is it will take me twice as long to make my money back. I asked him to repeat what he had just said to me, not because I didn’t hear him but I was hoping that something may occur to him from his last comment.
It didn’t so I asked him:
“Why do you automatically halve your size?”
“So if the next trade is a loser it won’t be too painful and if I have a winner I can get my confidence back”. This made complete sense to him and back when I was trading, it would have made complete sense to me too.
However, I believe this is a misunderstanding of a greater intelligence that we have on our side. It’s called ‘Wisdom’ and it’s always got your back. My job is not to say that he should or shouldn’t reduce his size. I know that when he has clarity of mind, he will make perfect decisions. My point is “why would you always reduce your size by half when the next trade that you take could be the opportunity that you have been waiting all month for?”
My job as a Trading Coach is to help my clients to perform at an elevated level. To give them the best chance possible of being the best that they can be, to be the best trader that they can be. They will learn that:
Being present and in the moment they will be free of insecure thinking that will restrict their ability to make good decisions.
So my question to my client was “what has the last trade got to do with this one?”
He replied “nothing”.
It is so easy for a trader to be affected by their previous trade, whether it is a winner or a loser and in their innocence, this restricts performance rather than enhancing it.
There is only this moment and the more that we look in this direction, the less bent out of shape we become when the previous trade was a loser.
“When thinking clears, wisdom appears”
As previously said it may well be the right thing to do, to reduce your size but doing it because “that’s what I always do” will prevent pure clarity of mind from helping you.
He is a keen golfer, so I asked him “if you got a double bogey on the previous hole you wouldn’t always take your 5 iron from the next tee”?
He said no he wouldn’t.
“What would you do”? I asked.
He said “I would take whatever club felt right regardless of what happened on the previous hole”.
We think that by focusing on the past and future that will give us the necessary edge, it couldn’t be further from the truth. Wisdom in the moment will trump everything.
This made sense to him.
I then asked to repeat his answer to the original question. I then asked him “why do you need to make your money back?”
Initially he seemed perplexed by my question.
As much as that may seem logical for a trader to want to make the money back, if a trader has that mentality I assure you they are more likely to make poor decisions as opposed to good ones. This goes back to what I pointed to earlier. As soon as we are focused on the past or the future, we are no longer in the present. If we are in the past or the future, it will influence our decision making in a restrictive way. Whenever our intention is personal we put the cart before the horse.
If a friend goes out with the intention of meeting a future girlfriend the chances of that are minimal. We all know people who have done that or tried it ourselves.
If we have the mind set of going out there with no expectation we open ourselves up to all sorts of possibility and opportunity.