3 Primary Causes of Losing Trades

03/05/2012 4:00 pm EST


Rande Howell

Founder and Owner, Trader's State of Mind

Losing trades are either caused by method mistakes, mental errors, or factors beyond the trader’s control, says Rande Howell, who tells how to learn and improve with every (inevitable) loss.

Well, as traders, it’s very easy to take our winners. There’s no problem there, but how do we deal with losing trades and still have confidence to go on and trade again?

Our guest today is Rande Howell to talk about that. So, Rande, how do you lose well as a trader?

It really falls down to recognizing that your plan works and that probability is on your side.

If you’ve developed discipline, when you do lose, there are three major questions: Is this a method mistake, is it a psychological mistake, or is it just simply I’m on the wrong side of probability?

If it’s a method mistake, you work your plan. You either go back to your plan or you alter plans so that it reflects the reality that you’re working in the markets.

If it’s a psychological mistake, that’s where you have to work. The mistake is what’s telling you that you need to work, and the brain only learns from mistakes, so losing is a way that you’re just short circuiting, you’re saying, “Okay, I have to learn here.”

The attitude you bring to learning is the key. If you bring fear to learning, you’ve got problems.

Most traders start out paper trading with a “fake” account; it’s not real money, and they find they can do really well because they don’t have that fear of losing money. The moment they flip the switch and it’s the real account, something changes.

Is there a way to keep that same mentality that I had in the paper trading account when I move over to real money?

They’re two different animals. Risk is not involved in paper trading. The key is the moment risk is there, uncertainty is there.

You are going to lose in trading, and you are going to win in trading, and it’s the discipline that you bring about losing.

If you’re doing your plan; if you do your review and there’s nothing you would change, just let it go. Again, the others, if it’s a method mistake, you correct. If it’s a psychological mistake, you correct; but without a mistake, you didn’t know.

I think one of the biggest questions is like you mentioned, you let it go. The best traders that I talk to can do just that. They forget about that losing trade immediately, and they’re moving on to the next one.

How do you know it’s not that I’m reading the market incorrectly that day versus I need to change my strategy? Basically, how do you know whether it’s a probability problem or a method problem?

Well, that’s your review. When you go back to review, you’re in a different state of mind than you were when you were trading.

In trading, there is a highly disciplined, highly impartial, very courageous mindset that’s required. When you’re doing review, it’s more of a speculation. You’re exploring; it’s a totally different kind of thought process.

Whether or not you can ever tell, most traders know if they’ve made a methodology mistake. They know if their psychology got out of hand. They will be able to see the queue, and they go back to the rituals in their psychology to be able to reform so that their mindset is very, very squared with trading.

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