How to Break The Losing Cycle

Why Most Traders Fail

Let’s define what failure is in trading terms. There really is only one event that signals failure and that is when the trader has detached themselves from self-discipline and the result is to blow up your trading account.

Most traders know having a string of losing trades is not a failure. It might be because of poor trade selection and over trading, but these are often signals for you to be aware of to adjust your approach.

Profits need to be added to your account gradually. Losers taken in the same way, gradual. Either way, it should not have any huge impact on your trading account or your trading psychology.

For most, there is the need for more. We all want more money, more things, more stuff, more time, etc. Traders want more gains. With the gains comes more exposure. The exposure then eats away at your trading psychology and your self-discipline becomes fractured.

The fractured mind is now struggling to see the reality and the process that is needed for disciplined trading success.

The Big Fail

What I am about to tell you is something that is the number one reason for retail traders failing. It is not because of anything else but this.

We need to talk about what is going on in the trader’s mind that causes this number one failure.

Traders fail because of one big trade. It is the one trade that they believe will reverse and take them back to break-even or a tiny loss. The same trade gets added to or better known as “averaged down”.

The initial trade in your mind would always be a winner. You never gave it a thought it could be a loser. This trade is worthwhile investing in due to various supportive reasons. As the trade moves against your original entry, you pin point another level to enter the trade. This now gives you an improved average entry.

At this stage, any money management rules have been broken, but you have quickly justified the position. Reality is, your judgement is clouded and very biased.

As the trade continues to work against you, your stress and frustration levels build as you identify another trade entry to average the entry level. Price only needs to pull back 50 pips to get you out of jail.

Your rotten luck continues and price has moved several hundred pips away from your original entry point and a margin call is nearing. You are in no state of mind to make any sound trading decisions. I liken this to a person who has had way too much alcohol before driving a car.

Getting out of this hole will take time, money and patience, these are the very things you are short of.

The outcome of the big fail normally leads to a trading account that has been smashed to pieces. Let’s look at why this happens.

Why it happens

Below is a list of reasons. Most traders will have most of these issues and thus the big fail.

  • A need to be right

In life most people do not except that they are wrong. They find ways to justify their position and prefer to blame people or circumstances rather than taking full responsibility for their situation.

This will play out in your trading even though you are not aware that this is happening. A need to be right makes us humans feel better about ourselves. Stripping back to self-reflection is not one of our better human traits.

  • Greed

I have mentioned in other blogs the need for more. Trading offers a great opportunity for more. It is the very thing that makes traders break money management rules.

Profits for most traders grow very slow but blow up their account in a brief moment.

The patients to build a trading account in a methodical manner is difficult for most. Once the greed function takes over, leverage is abused and the account is demolished.

  • A polluted mind

When you are in a situation that is not considered “normal” your body functions in a different state. If you have ever been in a road accident, physical fight or put out of your comfort zone, your brain will start to starve from oxygen. The result is that you do not think and respond to the situation that is best for your outcome. You become a different person. Fight or flight takes over.

When you have strayed away from self-discipline, your mind and physical state change. You now can no longer see clear, think rational and make trading decisions that will support you in a positive state.

Instead you look for the short term, quick turn-around home run solutions.

  • Letting go

To trade, you need to let go of outcome. As traders, we are looking for a high odds trading opportunity. There is no certainty of the outcome.

Day to day we try to control many of our daily events. The time we eat, go to bed, how we communicate situations, etc. We are conditioned to control, and the result is that we cannot let go.

Death for most is scary and we fight death. Perhaps this is because we have no control over when, where and how we die so we fight it our entire lives. What if we were to “let go” and allow nature to play out of its natural course, perhaps then we would have little fear of death and view it as a cycle of nature as one person makes way for the other?

Traders do not want to let go of outcome, They want to somehow influence and control the event. This is done by averaging into the trade with a do or die attitude.

  • Do not take it personally.

We view that our trade outcome (win or lose) reflects our own existence or who we are. By doing this,this we now apply this thinking upon our trades. If the trade is a winner, we are personally winners and if we lose; we are personally losers. We think the trade reflects who we are. It should not.

The trade is only a transaction with a chance of winning or losing. It is nothing more than this.

Because of us taking things in life personally, we take the losing trade personally as a negative of our being.

Many people say they do not take things personally. It is very difficult not to do so. Start thinking about how much we take personally. Every day we react to various situations because we take things personally.

Our trades are a simple financial transaction with a win-or-lose outcome. There is nothing personal.

We need to manage the trade with discipline and a focused approach, let the outcome be what it will be.

The book The four agreements’ has many helpful hints for traders.

  • We assume we know what will happen next.

The cycle continues. By using the need to be right, greed, polluted minds, unable to let go and taking things personally, we now assume that we know what will happen next.

By thinking this our mind is biased towards an outcome. It is an outcome we cannot control or even influence but yet we assume we know where price is heading and how it will respond.

By assuming what will happen next makes us feel good when the event is proven correct. This very endorphin release is a drug. This drug impedes us trading with the focus on execution, and instead we look at outcome.

Consider how often we make daily assumptions and how many of those assumptions can be wrong. How can we think that making assumptions upon the financial markets can be positive to our trading.

The Real Work

Trading will push you and shove you from one end of your mind to the other. You must be mentally stable whilst trading. You also do not want to overthink everything. Try to be in the flow without forcing yourself to be someone you are not.

Discover your discipline strength and weaknesses.

Successful trading is a road of self-discovery that is expressed through your trading results.

The Losing Cycle

You finally believe that you have shifted your trading ability to a level of profitability and consistency. After all, you have been trading with discipline and a small portion of good luck for several months.

The last time you had a major drawdown on your trading account was when you abused your leverage allowance and averaged into a trade. It was only a lapse in concentration otherwise it too would have been a winning trade and you swore that you would never make that same mistake again.

Over time, the pain of the “out of control” losing trade softens. We don’t forget but we believe that we have moved on and matured as a trader and will manage the situation better if this ever happens to you again.

Five Survival Techniques

Remaining grounded and in touch with your own emotions can be the most difficult situation to manage as a trader. Every trader will have a unique manner in how they view and trade the market. There is no right or wrong.

The real difference between success and failure will be how you manage yourself. The list below will give you hints on where you might need to develop as a trader to avoid the large drawdowns on your account.

  • Quality trade selection (Understanding the market)
  • Tight money management and risk control (Risk management model)
  • Excepting the trade outcome before you enter the trade (Understanding the flip of the coin)
  • Remaining humble win or lose (No room for ego)
  • Strong focus on process and not outcome (Manage pips not dollars)

Note that the five survival techniques above have everything to do with YOU. If a trader can become excellent at all five techniques, then success will follow. If the trader fails at just one of these, then it will be a race to the bottom.

Can you for a moment imagine that you have all five techniques mentioned totally anchored within your trading psychology? What type of trader would now be or could become if you mastered the list provided?

This is the secret to trading. Every trader will have a method or an approach that works for them, but without the development of your own mind, you will only lose at trading.

As a guide, it will take most new traders two to three years to be comfortable with a trading approach, trading platform and the market. It is after we have established this, we move towards self-development and this is where the true challenge for the trader begins.

Traders are polluted with advertising rubbish that offers traders an easy road to success. The truth is, there is no easy road to success. The success needs to be earned and if you hang in there long enough and become a well-rounded trader and person, success will gradually feed into your trading account.