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The Problem of “Trading Not to Lose” and Overcoming It
Trading not to lose is an issue almost every trader will face at some point in their trading career. Learn why trading with fear can cause a host of problems, then learn how to better handle that fear so you are making better trading decisions.
I was recently reading one of Doyle Brunson’s books–he’s a no limit hold ’em poker legend–where he talks about this issue in the poker world. In order to be a great poker player you need to be opportunity seeking, and not afraid to put your money at risk when there are opportunities to exploit your edge. Ultimately, great traders, athletes, poker players, or anyone at the top of their field, share one similar trait: they aren’t afraid to lose. They go after it, have a killer instinct, and want to take every opportunity they can to implement what they have practiced and studied.
Trading not to lose causes major problems for traders. Here’s what it is, why it’s problematic, and how to get yourself into an opportunity seeking mindset.
Trading Not to Lose is Fear-Based Trading
As traders, we want to respect the market, but not fear it. It’s neither our ally nor our enemy; it’s a neutral sea of both potential and risk. Trading out of fear means we are too focused on the risk, and are unlikely to capitalize fully on the potential.
Trading not to lose, which is fear based, can cause the following symptoms (some or all) to develop:
- You try to guess which of your trading signals are likely to be winners in an attempt to avoid the losing trades. By skipping signals you move away from your tested trading plan and strategies, and randomize your results. This is known as “trying to outwit” your trading plan.
- Losses aren’t taken when the stop loss level is reached. The loss is allowed to run, resulting in bigger losses than planned. Fear is a tricky thing in that it can cause us to get more of the very thing we are trying to avoid. When we are afraid to take a loss–because we haven’t fully accepted that losses are a natural and regular occurrence in trading–we may actually try to avoid taking losses and thus run our accounts into the ground. This is an element of “loss aversion.” It’s important to understand, on a belief level, that losses are part of trading. They can’t be avoided, and trying to avoid them may actually cause more damage.
- Trades are not allowed to develop. Contrary to the problem above, the trader is afraid of any sort of loss, or of a small winning trade turning into a loss. The trader knows the market gyrates back and forth, but they are “jittery” and therefore don’t allow their winning trades to compensate them for the risk they are taking. The trader continually gets out of trades at a small loss or profit even though their stop loss is in no danger of being hit at that moment, and the price hasn’t reached their target.
- In general, fear can cloud judgment. In real-time, the trader may be so afraid to lose they don’t even see opportunities occurring. If you continually see trades (that you should have taken based on your trading plan) only in hindsight, fear may be causing you to actually filter out information and cloud your perception.
These are symptoms of trading not lose. Trading not to lose is a product of focusing on whether we win or whether we lose. But winning or losing actually shouldn’t be our focus.
As traders, it’s our job to come up with (or learn) strategies, develop a trading plan, and then rigorously test that plan for profitability and our ability to personally implement the plan.
Once we have a plan, our goal is to trade according to that proven plan. The plan is researched, backtested and/or traded in a demo account, and then traded live with small amounts of capital until the plan is proven successful. Wins and losses take care of themselves. While we are trading we can’t care about wins and losses…we only care about following our plan and trading every valid opportunity our trading plan gives us.
When we aren’t trading that is when we can look at our wins, losses, profitability, and trading stats to possibly make adjustments if needed to the plan. But this doesn’t occur during trading; while trading and holding positions our focus is only implementing our plan.
This is easier said than done, but understanding and accepting the following will help.
Believe in Probabilities
While winning is the ambition of traders, “not losing” actually ends up being the dominant factor that affects trader’s decisions. This is because it is very easy to have knowledge of risk, but it is something entirely different to believe you can overcome it. This requires an internal “belief” change, not just knowing that a change is required.
In an effort to not lose the aforementioned symptoms develop, resulting in the trader losing their capital. How can we change our mindset to help avert this?
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Consider “the house” or casino in a game of blackjack. Each trade you make represents a hand of blackjack. There is the house (a buyer or seller), and there is the gambler (a buyer or seller on the other side of the trade). The difference between them is that the casino owner has a percentage edge over the gambler. Disciplined traders also have an edge, and can therefore be equated to the house or casino owner.
While playing blackjack have you ever seen a casino owner run downstairs to stop a hand of blackjack from occurring because he thinks he might lose on that hand? Never. Gambling regulations aside, casino owners actually want as many hands as possible to be played because they know they have an edge on each hand. Casino owners also know something else: each hand is independent of other hands. Anything can happen on a single hand! The casino owner knows we can’t predict which hand is going to make the house money and which is going to make the gambler money. All he knows is that each hand is independent–in that anything can happen on a particular hand–and that he has an edge over many hands.
Over a great many hands the casino holds a 3.5% to 4.5% advantage, varying based on house rules. While the casino may lose tons of hands, at the end of year they are likely to have made 3.5% to 4.5% on all the bets placed at their blackjack tables. The more bets placed, the more the edge is exploited, the more profit they make.
The bottom line is that traders need to adopt the “casino owner mindset,” realizing the result of each trade is unpredictable and therefore every valid trade, within the context of the trading plan, must be traded. Also, know that trades are independent of each other. While you may have a string of losses, that doesn’t mean there is something wrong. Allow your edge to play out over many trades. Trust your edge, as the casino does, that over the course of a week, month and year your edge will produce a profit. This assumes you have edge, which is why you need tested strategies.
No single trade matters to a pro trader. Whether it is a win or loss makes no difference. The only thing that matters is exploiting the edge and taking valid trades, because over the long run all those losses and wins will make the edge (profit) materialize. And the nice thing about trading is that traders can create a much larger edge than the casino has.
Reading or understanding this analogy won’t create any change in behavior, it needs to be incorporated into your belief structure for change to occur. Incorporate it into your belief structure by meditating on the concepts, write down notes and your thoughts related to it, so that it begins to seep into your brain, overtaking the current belief structures you have about the market which result in ‘trading not to lose’. Put notes beside your computer, and continually remind yourself to adopt the “casino owner mindset,” and all that it entails.
Final Word on Trading Not to Lose
Adopt the casino owner mindset. If you do so, you won’t care about whether you win or lose a trade. You will be more open to seeking opportunities. If your system is proven, over many trades you know you have an edge and profits will come. Take every valid signal you can, so your edge materializes. Think of it this way: if you know you can win 60% of the time by guessing heads on a coin flip you’d be trying to get as many people to bet you as possible. The same goes for trading. If you know you win about 60% (even 51% of the time, or 40% if you make more on your winners than you lose on your losers) of the time you should be taking every valid trade you can so you can exploit your probabilistic edge. If you try to figure out in advance which coin flips or trades will be winners and losers, you become the sucker.
For more on these topics, see the interview with Mark Douglas, trader and author of The Disciplined Trader and Trading in the Zone. His books are definitely worth the read, and that interview discusses some of the topics from those books.
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Are You Trading Not to Lose?
The opening bell just sounded and you are putting on a trade. You’ve got your plan established…you’ll buy the demand level on the 60 minute chart of the NQ E-mini that you analyzed yesterday. The price action on the Globex chart is confirming the plan with an overnight low that coincides with the demand level that you established. You have your entry, target, stop and exit planned. After you enter you become gripped with anxiety and fear because the price action is inching toward your stop and is falling beyond the levels that you picked. You begin to second guess your plan and in a fit of doubt you exit the trade as the tick momentarily went to break-even. As you sit on the sidelines, you are feeling some temporary relief because you are no longer anxious, but a little later you’re feeling really stupid as you watch the price action turn up just where your analysis and plan had indicated. For the next 15 minutes you watch as it hits what would have been your target. You “would have had” a nice profit, but your self-doubt has caused you to “trade-not-to-lose” again; and snatched defeat from the jaws of victory – again!
Like most emotions, doubt is normal. It is when doubt takes over your mind and influences behavior that you must watch out for … and you must be careful as this could be foreshadowing a much more dangerous core issue. Larry Wilson in his book “Play to Win” asks whether your orientation to life is a play to win strategy or playing not to lose. Allow me to briefly explain. A playing not to lose strategy is based on the need to remain in your comfort zone and constantly look for temporary emotional relief by giving in to impulsive behavior and hoping you get the results you want. Things must come easily when playing not to lose. People with this strategy are constantly looking for the magic bullet or the quick fix that will create results out of thin air with no regard for their development. The philosophy of playing to win on the other hand is about the notion that life is growth, that courage and meeting the challenge are the harbingers of success. It is about commitment to excellence and a belief that learning (both about the market and the unconscious faulty ego driven beliefs) is critical for both professional and personal effectiveness. The core maps (your mental models that filter perceptions) of playing not to lose are driven by fear and greed. These emotions are attached to deep seated limiting beliefs about yourself and out of these limiting beliefs come thoughts. Thoughts similar to the following; “…I must get out of this trade, I can’t possibly allow any losses that I can prevent; that would mean I’m wrong and being wrong is for losers. Conversely, the core maps of a person playing to win reflect a belief that losses are a part of trading, that every small loss gets you closer to a big win; and that there is an abundance of opportunities, that they don’t have to worry about being wrong and impulsively exiting one trade because there will be another, and another after that..
Playing to win also entails the search for objective reality and holding on as you would to a life jacket in a stormy sea; a reality about what the charts are showing and what is going on in your thinking…you’re not paddling up the river of “denial.” A playing not to lose strategy is closed with limited alternatives; it blames others or outside influences first and seldom looks inside to identify issues that are negatively affecting results; this strategy promotes irrational thinking. The play to win strategy owns all results by using techniques like journaling to find out what is and is not working. The play to win trader is prepared to use protocols and effective routines in order to develop skill oriented habits and ensure sustainable success. This strategy is intellectually and emotionally honest along with mustering the enthusiasm and energy necessary to vigorously take on trading weaknesses, but you can’t take on a weakness that you either don’t know or don’t understand. Playing not to lose encourages erratic and illogical behaviors, while looking for the easy win often leads to putting large positions at risk and reneging on commitments to established rules – if they have rules at all. The play to win strategy recognizes that trading necessitates losses and that effective long-term winning means managing risk, having an iron clad commitment to rules, goal-setting, planning and methodical, smart trading. The play to win strategy is winning the psychological war with yourself, one battle at a time – “going as far as you can with all that you’ve got” in a growth oriented, fun, honest and healthy way.
Your issues, obstacles, and problems that plague your trading must be treated like an infestation in your home, you want to know if the cockroaches are there so you can weed them out and get rid of them. That’s why the “Thought Journal” is a critically important addition to your tool belt. Most of you already know that smart trading means tracking and documenting your trades in order to get data on how well your trade plan is working. Similarly, you must also gain data on what you are thinking and feeling because this is how you uncover the unconscious issues that act as drivers to bad behaviors which bring on unwanted results. But you’ve got to be willing to dig deeply to find out; you must pull back the layers of the mental onion and face your issues so that with the right tools you can successfully resolve them. We teach these tools in the XLT classes and the Online/On-location courses. A “don’t bring me no bad news” outlook is going to turn you into a Sisyphus, the Greek mythology character that was doomed to roll a boulder up a mountain only to never reach the top. You’ll never reach the top of your trading goals but will be doomed to push that boulder (your issues) until you run out of either energy or money and it’s usually the latter first; that is if you are unwilling to look at your ego driven, unconscious faulty beliefs. The smart trader accepts the challenge and realizes that playing to win is also trading to win and they are both about the long haul.
So, you must decide which life strategy you are willing to undertake in the service of your trading. Will it be the courageous and comfort-zone expanding playing to win, where you are committed to growth and excellence? Or, will you reach for the easy button with a strategy based on not wanting to get outside of your comfort zone; avoiding challenging yourself and living by default with blinders on. The choice is always yours. Remember, playing to win is trading to win where you are going as far as you can with all that you’ve got! This is part of the philosophy of bringing and keeping your “A” Game at your platform while using a plethora of tools in your handy tool belt. Ask your Educational Counselor for more information.
Are You Trading to Win or Trading Not to Lose?
As an answer to the title question, many traders might say that they are trading to win. But, actually you might be surprised to know that most people are trading not to lose when participating in the financial markets.
Trading Not to Lose
What is the difference? Well, let’s begin with trading not to lose. It is based on the philosophy that as a trader, you must remain in the comfort zone and if you are knocked out of your comfort zone, you must scramble to get back in by grabbing the first thing that affords you temporary emotional relief by giving in to impulsive behavior and hoping to get the results that you want. Trading not to lose is based upon the notion that trading results must come easy and the trader is constantly looking for the quick fix or the magic bullet in the form of an indicator or setup.
The perceptions of the trader are driven by negative emotions like fear, greed, doubt, guilt and anger. These emotions stem from deep-seated limiting beliefs about yourself, and out of these limiting beliefs come thoughts; for example, ‘I must move my stop or I’ll get stopped out and that means I’ll lose.’ A trading not to lose strategy is closed with limited alternatives; it blames others or outside influences first and seldom looks inside to identify issues that are negatively affecting results; this strategy promotes irrational thinking. Trading not to lose encourages erratic and illogical behaviors, while looking for the easy win often leads to putting large positions at risk and reneging on rules.
Trading to Win
The philosophy of trading to win, however, is based upon the notion that trading is a journey in self-discovery and that trading as in life is about growth, courage and meeting challenges. Trading to win is about having a commitment to excellence and a belief that learning is critical to success. It is based on a conviction that losses are lessons and an expense of being a trader; that failure is only feedback. Trading to win also embraces the power of patience in waiting for the high probability trade. Trading to win entails the search for objective reality and holding on as though your life depended upon it (and your trading life does). The trading to win strategy owns all results by using techniques like journaling to find out what is and is not working. It is about holding yourself accountable. The trading to win trader is prepared to use protocols and effective routines in order to ensure sustainable success. This strategy is intellectually and emotionally honest. Furthermore, when you are trading to win, you have the enthusiasm and energy necessary to address your trading weaknesses, but you can’t address a weakness that you either don’t know or don’t understand. The trading to win strategy recognizes that trading necessitates losses and that effective long-term winning means managing risk, having an iron clad commitment to rules, goal-setting, planning and methodical, smart trading. The trading to win strategy is winning the psychological war one battle at a time.
Keeping a Trading Thought Journal
Your issues, obstacles, and problems that plague your trading must be treated like an infestation in your home; you want to know that the cockroaches are there so you can weed them out and get rid of them. That’s why the Thought Journal is a critically important addition to your tool box. Most of you already know that smart trading means tracking and documenting your trades in order to get data on how well your trade plan is working. Similarly, you must also gain data on what you are thinking and feeling because this is how you uncover the unconscious issues that act as drivers to bad behaviors that bring on unwanted results. But you’ve got to be willing to dig deeply to find out; you must pull back the layers of the mental onion and face your issues so that with the right tools, you can successfully resolve them. A don’t bring me no bad news outlook is going to turn you into a Sisyphus, the Greek mythological character that was doomed to roll a boulder up a mountain only to never reach the top. You’ll never reach the top of your trading goals, but will be doomed to push that boulder (your issues) until you run out of either energy or money and it’s usually the latter first; that is, if you are unwilling to look at your ego-driven, unconscious faulty beliefs. The smart trader accepts the challenge and realizes that trading to win is about the long haul.
So, you must decide which life strategy you are willing to undertake in the service of your trading. Will it be the courageous and comfort-zone expanding trading to win, where you are committed to growth and excellence? Or, will you reach for the easy button with a strategy based on not wanting to get outside of your comfort zone; avoiding challenging yourself and living by default with blinders on. The choice is always yours. Remember, trading to win where you are going as far as you can with all that you’ve got!
Are you Trading Not to Lose?
There is a subtle distinction between successful and unsuccessful traders. Successful traders don’t operate out of a fear of losing, while amateurs do. Do you want to lose? Likely not, but this is the wrong mind frame for trading in the first place. Trading not to lose means you haven’t fully accepted the risk of trading. Here’s why trading from the mindset of “not to lose” causes problems for so many traders.
Fear Based Trading
Trading not to lose typically involves a fear of losing which translates into:
- picking and choosing which trade signals to take (trying to outwit your trading system)
- Letting a loss run beyond what it should
- Not being able to fully capitalize on a move, and thus be adequately rewarded for risk (a problem with most binary options)
All these problems stem from one issue–being more concerned about whether you win or lose, than about simply following your plan.
Trading is Probabilities
Winning or losing is at the forefront of most novice trader’s minds. They desperately want to win, but even more so, they don’t want to lose. When you don’t want to lose, all the above problems develop. The main one (as it encompasses the others) being that by operating out of fear you don’t take all opportunities that market gives you based on your trading plan.
When you don’t take all the signals, or if you jump out of trades too early or hold them to long, you are no longer trading according to trading plan and therefore are likely to lose your capital over a great many trades. They very thing you didn’t want to happen, will happen. Why is this?
Think of a game of blackjack, except you are the casino, not the gambler. And each of your trades represents one hand of a blackjack. Have you ever seen a casino owner run downstairs from his office to stop a hand from going forward, or stopping a hand mid-deal in order to “bail out.” Of course not. Legality aside, casino owners realizes that one hand doesn’t matter. Each hand is independent of other hands, anything can happen on that one hand.
Over a great many hands though casino owners know they hold a 3.5% to 4.5% advantage (depending on house rules). So while they may lose many hands, at the end of year they are likely to have made 4.5% on all the bets placed at their blackjack tables.
Traders also need to adopt this mindset. They must completely let go of the outcome of individual trades. If they have a system that has been proven to win over a significant amount of history–whether they tested it themselves, bought it or learned it from someone else–they must trust that edge (like the casino’s 4.5%) and trust that it will come to fruition over a great many trades. One trade doesn’t matter. It doesn’t matter if you win or lose on it. If you are trading a proven winning system, over a great many trades you’ll win. As an added benefit, a good trading system can have a much greater edge than the casino has.
Most traders, while they try, can’t accept this when they go to apply it though. They let past winners and losers affect their judgement, when instead they just need to trade the signals happening now, and not worry about the past or the future.
Emulate the casino owner. They don’t care about whether they win or lose a hand at a table, even a lot of losses in a row typically don’t concern them. Over a great many days (trades) they know they have an edge. Your proven trading plan is your edge. Exploit that edge as often as you can based on the signals provided. Do this, and over time you will see that edge materialize, in profits, in your trading account. Try to guess which hands/trades will win or lose though, and you’ve just become the sucker on the other side of the table.
Trading To Win Or Not To Lose
Risk Management Or Profit Block
Risk management is an important aspect of binary options trading, the Catch 22 is too much management, or the wrong kind, can manage you out of your profits. Think about this. The stock is market is very risky and risk takers are rewarded with profits. The bigger the risk the bigger the profits. These profits, the lure of these profits, attracts millions of people to the investment world each year, and each year most of them barely make any money, and many of them lose their asses. Why? For those who chose to let others invest for them, laws in place limit the amount of risks that average people can take and by so doing, limit the amount of profits they can make. For those who chose to invest and trade for themselves poor money management, excessive risk or black swan events keep them from making profits or worse, wipes them out of the market.
This doesn’t mean that you should go out and take on the biggest risks you can, or that simply using a money management technique is enough, that would be dumb. My point is that there is a fine balance between risk management and handicapping your ability to make money, a balance between playing to win and playing not to lose. How does this apply to binary options? In a couple of ways and the first I want to bring up is the old Martingale strategy. We all know that Martingale can be a fun way to play at the casinos, it’s a fun little trick that helps us defray losses for a time in order to hopefully make that big win before the losses pile up and end our night out. What many fail to recognize is that when applied to binary options Martingale may keep you from losing, but it also prevents you from making profits.
- Martingale is a betting technique that starts out at a set figure, X, and keeps all bets at that figure, X, until there is a loss. The next bet is then 2X so that a win will cover the loss on the first trade and produce a win of X. If that trade is a loser then the next trade is then 4X so that a win would cover the losses of X+2X and a profit of X. Each time a loss is incurred the next trade is then doubled to cover the loss of the previous trade and all others before it, and a win of 1X.
When you trade binary there is no big win, all wins are the same, or basically the same, whatever your brokers average payout is. By using the Martingale you can delay taking the loss on one trade, but you will never hit that big win. You may have a streak of wins, but that streak could just as easily become a string of losses that leads to a big trade, one big enough to wipe you out. If it does turn out to be a winner yes, you recover most of your losses but not all because binary doesn’t pay out at 100%. This means that any Martingale strategy you use, if it is to fulfill its true purpose, must increase each successive trade by MORE THAN 100% in order to cover the losses on the trade before it. This means a geometrically expanding figure that can go from $100 to $225 to $506 (assuming 80% payout) and on and on with your risk growing exponentially out of control in order to make a measly win of 80% the original trade, if you hit on a winner before you wipe yourself out of the market.
Clearly Martingale is not the best method here, it is playing not to lose. Savvy traders will suck up the original loss, focus on their win rate and use a more sound money/risk management technique that limits losses to an amount that will not hurt your account, even if you have a losing streak, and allows winners to win. I call it the Percent Rule but it is called many things by many people, basically it says that all trades are a PERCENT of your total balance. By using a percent instead of an amount the size of the trade will grow as the account grows so that your profits grow in tandem. Losses suck but what can you do, everybody makes losses some time, the percent rule prevents them from growing out of control. So long as your win rate is above the rate needed to be profitably you are in good shape, no single loss will prevent you from making the next trade and the net amount of wins will more than offset the losses. Basically, it will ensure long term success, profitability and trading. I personally use the 3% rule in my own accounts, all trades are always 3% of my account balance, some people go lower at 1% and some as high as 5%.
No matter your approach you need to take a step back and ask yourself the question, am I playing to win or playing not to lose? If your management helps limit losses and leaves profits free and clear then you are on the right track, if not you can always use the Percent Rule, it hasn’t failed me yet. In the end, it is far better to accept each loss as it comes and move on to the next trade rather than compound those losses with additional losses and allow emotions to cloud your judgement.
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