Loss aversion

Petri RedelinghuysLatest, TraderPetri

Loss aversion

When I started writing this blog for Just One Lap, I made a promise to myself and the readers to always be honest about the things that I write about. Keeping true to that promise, and probably more importantly – being honest with myself – I need to acknowledge that I find myself falling into some of the exact same pitfalls as I did the first time I was in a day trading room years ago.

I guess that trading CFDs with predefined risk and high probability setups is a lot easier than day trading from reading the tape. I’ve mentioned before that it is a completely different skill set, one that I need to practice and master pretty much from the start. I can’t exactly sit back and say “well, it’s all so different and that’s why it’s acceptable that I am messing up”, because it is absolutely not.

This is my future, my passion, my life, the only thing that I care about. It’s bigger than just trading, it’s constant self-evaluation and improvement that will not only improve my trading and thus make me money, but will also spill over into other aspects of my life because the disciplines learned and practiced in trading can impact your entire life.

So, what are the mistakes I am making?

Not sticking to my stop loss rules

This is twofold… I have a rule in place that limits the maximum amount of money I am allowed to lose in a day and I often (read: always) find it difficult to stick to this rule. Then there is the stop loss per individual trade… I find that I am not stopping out until the trade has pushed me to a point of maximum pain.

On the days that I do well, I am easily able to cut the trades that go against me within moments of realising that I am on the wrong side, and to move on to the next trade. But when that tilt starts to set in, I simply cannot get myself to cut bad trades. It’s like I am paralyzed. This is something that I need to work on.

There is actually a bit a trend here… once I am past my max loss for the day limit, stopping out becomes more difficult. I think what people don’t say when they teach you about trading is that managing risk is extremely difficult from a mental discipline perspective.

Revenge trading

Let’s say that I’ve traded in six different shares for the day and have made some profit on five of them… that one that I am red on… I want my profit from that one, so I’ll dig at it and dig at it and dig at it until that stock has taken all the money I’ve made on the other five, and then some more.

The other way in which this rears its head is for me to want to make back my most recent losing trade and then trading bigger in order to quickly make back what I just lost. I cannot stress how stupid this is. I know it is. I’ve seen it destroy. Yet, here I sit, doing it. This stems from a need to be right, I know that. I know, rationally, that being right is not all that important. I struggle though.

So, there you have it. The two things that I think are busy making my life difficult. Two things that I am doing to myself. And two things that I have now written. The truth here is that writing this stuff out helps me process it, so having taken the time to write it out and think about it helps me a lot.

Onwards and upwards!

Happy trading!

Petri Redelinghuys

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