There are so many reasons why traders lose money, but I often think that the worst of them is the simple refusal to see what is taking place, even when it is right in front of your face, and do something about it.
You might say that that means that the greatest sin is pride, but I think that would be an oversimplification of what goes on. Pride is certainly one of those traits that can cost money, but I think the behavior that underlies repeated mistakes runs deeper. I think it actually comes down to the identities that we build for ourselves. When you identify with a trait or even a life situation, there is an instinctive need to protect that identity. After all, you are protecting yourself—or rather you think you are. But you are actually condemning the best version of yourself.
This may be a puzzling and somewhat esoteric concept, so let me try to explain with some examples of common behaviors and situations I have run across in the past.
Identifying as a Risk Taker
Let us consider a hypothetical trader named Joe. Joe has ambitions toward becoming a full-time binary options trader. Before he got into trading, he played Texas Hold’em. That was something else he wanted to do for a living, but he never quite got there. The reason he wanted to play poker for a living was because he loved the thrill of taking a gamble, living on the edge, and becoming successful at it. He has carried that mindset into trading, and as a result takes wild risks on a regular basis which cost him money.
Joe is aware on some level that trading like this is costing him money, but he winces every time he thinks about holding back. It feels to him like he would be giving up an important part of who he is. How can he achieve his dream of risk-taking his way into success if he gives up risk-taking?
The answer of course is that he has to give up that dream and the identity he has built around it if he wants to become successful. He cannot win reliably at trading if he continues trying to “live on the edge.” He has to become a more conservative trader.
It is hard to give up something you identify with. It can lead you to say, “I’m not doing anything wrong,” to yourself and to others. When questioned about his outlook and decisions, Joe is prone to defending himself. He may even go off about how risk-avoidance is a bad attribute. On some level he may even be right about that, but it does not make his behavior any more profitable, because he too is at an extreme.
Before Joe can start winning consistently at binary options trading, he will have to make the choice to not only see trading differently, but see himself in a different light as well.
Identifying as an Expert
Another common mindset which you have probably encountered yourself at some point is the trader who identifies as an expert—despite oftentimes being a complete beginner. Sometimes people identify as expert traders before they ever register a single account! Maybe they studied economics in college, or maybe they once made a correct random guess about the direction a stock was going to move. If that move surprised everyone around them, they became even more convinced of their own brilliance (it does not help that others reinforced it).
However it happens, you sometimes meet a trader who believes that his gut is some kind of scientific instrument—or worse, a supernatural one, actually capable of reading the future. This trader believes he is always right. And if he loses? He simply adjusts that perspective a bit and determines he will be right over the long run. Either way, he is infallible.
I knew a trader like this once. His name was Greg. Greg was so convinced with the myth of his own genius that there was no talking sense into him, even after he lost the trades he had boasted would be a winner.
It is very hard for a trader who has this issue to change, because anyone who questions his judgment is questioning that infallible identity. Even though that identity should protect itself were it truly infallible, he still feels an instinctive urge to shield it.
It is really important to know that it is okay to be wrong sometimes. There is no need to get defensive about wins and losses or pretend you know more about the market than you really do. There is a difference between being a good trader and being some kind of genius who can instantly connect the dots. You can give up the latter false identity without sacrificing the former. In fact, it may be what it takes to become a good trader for real and not just in your imagination!
Identifying with Fear
I think it is worth mentioning that sometimes the psychological traits and bad habits we bring into trading relate in some way to our lives at large. Let’s take another example of a trader, call her Sally. Sally has been trading binary options for a year with mixed results. Every time she loses a trade, she panics and pulls back from the market. Sometimes she does not take a single trade for weeks or months, even though there are plenty of setups.
Other traders have asked Sally why she will not pull the trigger, and she answers, “I can’t take any chances. If I am not absolutely sure, I know I will lose money. I am too responsible to take any risk I can avoid.”
Sally does not mention that she is the sole breadwinner for a family of four, or that she has experienced a spate of bad luck over the years. She and her husband both lost their jobs in the recession, and since then have struggled to get by.
This is an example of a trader who has learned to identify with bad luck and fear. She truly believes that the deck is stacked against her and that risks that would turn into winners for another trader will turn into losers for her. More than that, she believes that to let go of that belief will mean letting go of her positive traits—responsibility, patience, discipline, and the pursuit of control in an uncertain universe.
Sally is the risk-averse trader whose identity is bound to her avoidant behaviors. She is on the same curve as Joe, but at the opposing end. When Sally thinks about taking a risk, any risk, it is not just fear she is grappling with, but the erosion of her worldview, her past experiences, and her identity.
This is why it is such an oversimplification to say something like, “Fear is what holds traders back.” Sally’s fears are irrational in the sense that they have no basis in her current reality, but they are not groundless. Ignoring her past experiences completely would also be a mistake. Still, Sally will need to release this identity and belief system if she is to move forward with her trading.
And that will mean recognizing that both her negative and positive traits may be off balance. That is the whole problem with am imbalanced mindset. When your traits are out of balance, it is hard to tell which ones are helping you and which ones are hurting you. Oftentimes “good” traits can end up causing harm. It takes a complete reorganization to get those good traits back to where they should be. Only when they are balanced again can they help you without harming you at the same time.
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