Trading Psychology: Why We Can’t Accept Being Wrong
Rowan Crosby • 3 min read
Over the last few weeks, I’ve been taking a close look at some different elements of trading psychology. We’ve discussed goal setting as well as the psychology behind stop losses.
Today I wanted to have a look at another huge psychological barrier – being wrong.
No matter what type of trading you do, there are times when your trades won’t go your way. Despite the best setup that you might have seen all week, there is never any guarantee that the trade will end in your favour.
And for me personally, that has always been one of the toughest elements of trading. So when I was learning the ropes I started asking myself the question, why is it tough to be wrong?
It’s my personal opinion that we are programmed to feel bad when we make mistakes. And that programming is not something that we are born with. It’s something that is driven into us during our school and work lives.
When you’re a baby, making mistakes is part of the business of growing up. Babies learn to walk by continually falling down and getting back up again. Sure they might cry for a bit, but they ultimately shake it off and move forward.
However, as we get older the mistakes seem to take on more of a psychological burden. When we are in school if we get anything less than 100% in a test, then we haven’t done as well as we could. If we get below 50% then we have in fact ’failed’ and received an F.
As we get older the impact of mistakes becomes larger. If you’re an engineer and you make a mistake, a building could very well fall down. If a lawyer makes a mistake then they might see someone sent to prison.
So the ramifications are high. However, as traders if we get a 60% win rate, we certainly aren’t failures.
In fact, many trend followers achieve win rates far less than that. But those losers are still tough to stomach, because we often associate them with not being good enough and that those mistakes are extremely costly. For traders that simply isn’t the case.
So How Can We Overcome This?
There are a few tricks you can use to make sure that I am not falling into the trap of thinking I’m a failure if I have a few losing trades in a row. Especially when you’re a new trader.
- Sometimes I like to do trading drills. One drill to try is to actually try and go out and find losing trades. With a demo account only of course! Go and make as many bad trades as you can and keep a record. Try and lose as much paper money as you can. Doing this will help your brain accept losing trades and it might help you find some good setups. If you can consistently lose money, why can’t you just flip those positions around and make money?
- Define your expectations. Before trading live, you should have been paper trading. Make sure you document your trades and it will give you a good idea of your strike rate. You’ll then know how many trades you should expect to win and lose in an average week.
- Coin Flip Exercise: If you ask someone how many times in a row you can flip a head in a coin flip, they’d probably say 2-3. Go ahead and try it and record the results. I think you’d be surprised how many in a row you can get in a sample of even 100. It goes to show you that there is variance in trading, even if you have a 50% edge.
- Keep a journal. The best thing for traders to do is to get those negative thoughts out of their heads. Journaling is one of the most important elements of successful trading and good psychology.
Just remember, making a mistake might be bad if you’re a doctor, but as a trader, it is really just the cost of doing business.