In his book ‘The Daily Trading Coach’, trader and author Brett N. Steenbarger told a story about three traders who placed the same exact trades. And they all lost money.
But their reactions to the loss made the difference.
The first trader got discouraged, cursed the market and gave up for the day. The second trader got frustrated, went into revenge trade and lost even more money that day. The third trader pulled back, reassessed his strategy, waited for another opportunity and went into a winning trade for the day.
The story highlighted the different personalities that affected the outcome for the three traders. Remember the traders placed the same exact trades. And they all lost in that trade.
But the trader with the emotional resilience came out successful despite the initial losing trade.
Before we dig deeper into how you as a trader can develop emotional resilience, there are a few things to keep in mind when dealing with losing trades.
These may all look familiar and obvious to you, but it pays to be reminded of market realities particularly when you’re dealing with a losing trade or a series of drawdowns.
A lot, according to Steenbarger, who is also a psychologist and trading coach. He’s seen the impact of emotional resilience (or the lack of it) to the thousands of traders he’s coached and guided over the past few decades.
If we go by the research literature in psychology which describes emotional resilience as ‘the ability to maintain high levels of functioning even in the face of significant stress’, then it means traders need a truckload of emotional resilience as they are constantly exposed to fickle markets that can cause a lot of stress.
Steenbarger said a person who lacks resilience can easily lose focus and be overwhelmed when faced with a stressful situation.
As illustrated by the story of the 3 traders earlier, a trading loss can trigger different emotions from different people. What about a series of big losses? And what about a system failure – when your trading system stops working?
All these situations can trigger all sort of emotions and reaction from traders. Whether you’re a new trader or someone who’s been in the markets for years, most traders have been through some rough patches.
And it’s during those challenging situations where one’s emotional resilience can play a critical role.
Aside from developing your emotional resilience, there are also other techniques and strategies you can use to deal with stressful market situations like a trading system failure. You can learn more about these techniques from the eBook ‘Panic Over: 3 Rescues for When Your System Stops Working’.
In his book, Steenbarger pointed out an interesting observation about the lack of resilience.
He said: “A key reason why many people lack resilience is that they take negative events personally. Some portion of their self-worth is connected to their individual life outcomes.”
To a certain extent this is true of many traders who take losing trades personally. Some traders go through emotional distress when they can’t separate themselves from their losses. And this, according to Steenbarger is not healthy at all.
Based on his own trading experience and decades of coaching traders all over the world, Steenbarger said the most efficient way to build emotional resilience “is to undergo repeated, normal drawdowns and see – in your own experience – that you can overcome those.”
While this may not sound right to you or to a trader who is going through a long series of losing trades, Steenbarger said there’s merit in experiencing those challenging situations.
“Losses provide traders with a deep emotional conviction that you can weather those losses and ultimately prosper,” he said.
He added that a trader who experiences repeated drawdown, only to later hit fresh equity highs, knows he or she has nothing to fear during normal performance pullbacks.
According to Steenbarger, a resilient trader is:
Despite the focus on trading proficiency, expertise in using different trading tools and access to market analysis, traders must also work on building their emotional resilience to enhance their overall trading performance.
If you want to learn more about some effective ways to deal with trading system failure and other challenging situations in your trading, you can download our eBook about ‘Panic Over: 3 Rescues for When Your System Stops Working’.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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