The uncertainty of the trading environment is highly challenging. To be profitable requires knowing with confidence how to consistently perform at your best.
Even though most traders know what to do in order to minimize their losses and eliminate those blowout trades, statistics show that they find it impossible to do what they know.
In this article I will give an insight into why traders find it so challenging and what you can do to identify and eliminate your self-sabotaging behavioral patterns and turn your losses into profits.
Trading success is not just about trading systems and software packages; rather through building self-awareness, you can take your performance from ‘losing’ to ‘winning’ any time.
Anatomy of a Losing Trade
In order to find a solution, we must first exactly understand how specifically losing trades are being created.
This is important because the problem with a loss is not the loss itself. It is the vicious cycle that unconsciously gets set in motion on the back of it. Usually a losing streak starts with a perfectly acceptable loss and ends up in a string of losses and blow out trades like in the following scenarios:
Scenario 1: Your trading day starts well, you follow your rules, you focus on the process of executing your trades according to your trading strategy, you already have a few winners, your account is growing and you are feeling good.
Then the market moves unexpectedly and you find yourself in a loss. You close out the trade as per your exit strategy, it is no big deal, even though you don’t like it, it’s okay, you know you are well ahead and you can recover easily.
The next trade doesn’t work out either, you start feeling slightly annoyed as you see your hard earned profits melting away and your self-talk starts whispering in the back of your mind now. “Oh no, I worked so hard to make those profits…” “I hope I won’t stuff it up again like last time.” But you are still able to take the loss according to your risk requirements.
What happens next is your focus moves from being in the present to slipping back into the past, you vividly remember the last time when you had bad losses and now you start fearing the future, hoping you won’t repeat blowing up your trading account.
The vicious cycle has started: You find it hard to find your rhythm, no matter what you do you seem to always be on the wrong side of the trade. Price moves up, you go long but almost immediately price drops back down and you end up in another loss. You go short to get back with the trend, but now price jumps up again. You start what I call ‘binge trading’ and your trading account suffers from a string of losses.
You have started entering and exiting your trades impulsively succumbing to your urges because it gives you temporary relief from the emotional intensity of the urge.
If you don’t manage to stop yourself from binge trading, the point will come where you give up emotionally and let your loss run until your account is blown up.
Scenario 2: You have been doing really well, you managed to make a good profit and you can’t stop looking at the number of your trading account with pride. As the trading day comes close to the end you want to just make another $10 to round up the account. But instead of making another $10, you now find yourself in a $20 loss. These are the hardest for traders to exit, they don’t want to destroy their good looking trading record, they don’t want to give the profits back, and these are the situations that are most prone to end up as blow out trades; you lose it all feeling devastated and defeated.
Scenario 3: You have just made a $800 loss. Disregarding your trading strategy you are holding your trades too long because you want to make the whole loss back in one trade and instead of taking your profit you end up in another loss. The brain is designed to think in contexts and compare what is now with what has just been. So, if you just made a $1000 in the previous trade, and now you are in a $800 profit, even if your strategy gives an exit signal, you most probably don’t take your profit, you ignore it, because that little voice in the back of your head is telling you that if you just hold the trade for 5 more points you would have recovered the loss and maybe made back even more. You want that additional $200 to get square.
If your previous loss was $600 then you most probably are happy about the $800 because now you are $200 in net profit.
What do the above scenarios all have in common? You didn’t follow your methodology you know what to do but you didn’t do what they know. Rather you gave in to your urges and temptations and jumped into trades for all the wrong reasons.
Your trading process now becomes all about recovering the losses instead of making profits. You stop thinking through your entries and jump into trades, you think too much whether to get out of a trade or not until the loss has become so great that you are hoping for a retracement so you can get out at a lesser loss.
This type of thinking is counterproductive. Just like the famous coin toss example, the current trade has nothing to do with the previous trade. Each trade should be treated, managed and evaluated as a stand-alone individual trade.
But what am I saying, you know that of course, you have heard and read all the great tips on what to do and what not to do. Yet, sometimes it seems that you are not in control of your behavior.
Many of you will feel like I exactly described your trading experience here and if you can see yourself in the above scenarios don’t despair, you are not alone and more importantly, it can be fixed.
The reason why it is so challenging for traders to overcome their self-sabotaging behavioural patterns is because they are looking for the solution within the context of trading.
I often hear traders say ‘I just have to be more disciplined, patient etc.’; it never works because the problem itself is never the problem, a lack of discipline or patients is merely a symptom of a deeper seated root cause and once you uncover what the root cause of the problem is, the self-sabotaging behavior tends to simply dissipate without you needing to exert any willpower or force.
That’s why in my opinion writing a trading journal is not very useful as most traders stay confined in the boundary conditions of their thinking, it still doesn’t give them an insight into understanding why they do what they do and how to improve.
What is the solution?
Every person has an unconscious automatic behavourial strategy on how to respond to certain situations. That is why we keep experiencing the same challenges over and over again until we become aware of these strategies and are able to consciously change them.
A great starting point for uncovering those behavioural patterns are behavioural profiles. Not all, but many answers to your life’s challenges can be found in understanding how you unconsciously behave in certain situations, and what the consequences are.
Research shows that the most successful traders share a common trait: they understand why they do what they do, they have a high level of self-awareness. They recognize their strengths and their limitations, and developed a way to work with it.
A tool that I find useful is the DISC behavourial profile. The DISC profile gives me a great insight into the natural strengths and weaknesses of a trader in the context of their trading and what we need to work on.
Those who understand their natural behavioral preferences are able to take charge. On one hand they are able to define a trading strategy that compliments their personality and on the other hand they are able to replace behavioural habits that are detrimental to their trading success and are hence far more likely to pursue winning trades, in the right way, at the right time, and get the results they desire.
What is DISC
DISC is a behavior assessment tool based on the theory of psychologist Dr. William. This theory was then developed into a behavioral assessment tool by industrial psychologist Walter Vernon Clarke.
He observed that every single person is running internal programs on how they habitually interact with the world depending on the circumstances and how to make sense of the world. These behaviourial programs have largely been learned during our upbringing and once brought to the our attention we can change what doesn’t serve us any longer.
Marston's research uncovered four broad dimensions of these internal programs: dominant, influencer, steady and compliance.
It is important to understand that DISC focuses on behavior, how someone prefers to act, rather than personality traits. Behavior is flexible, personality is not. We never ask a trader to change their personality, but the markets constantly require traders to adjust their technique or what they do and how they do it.
There is no right or wrong, best or worst DISC Profile, there is no need to ‘improve’ your profile. I have profiled many successful traders and it is simply about developing your self-awareness, knowing what works for you and what doesn’t, and ultimately increasing the choices of behavior and how to maximize your trading potential.
The DISC Model in Trading
Very few traders will be a complete profile in their preference, they have parts of each dimension. Once you become aware of a behavioural preference that is not serving you and your trading you can change and adapt.
The DISC profile is quite a complex undertaking but it is well worth it. There are about 160 patterns to choose from, however for the purpose of this article I will have to keep it to a select few.
We can determine if a trader naturally prefers a trading methodology that is quite active and short term, or a calmer longer term trading strategy.
What is the traders core needs, it tells us what is required for them to be able to perform at their best and what self-sabotaging behavioural tendencies they are present and need to be managed.
It tells us what the traders natural decision making strategy is, do they need a checklist, do they perform best when they can follow their gut feeling, do they need to take a lot of time and process the information before they put on a trade or would they do well with making quick and fast dynamic trading decisions.
So we start seeing some amazing uses for analysing our trading behaviour by cutting through the noise and getting straight to the heart of the problem of the typical self-sabotaging behavioural patterns of each dimension.
Dominant behavioural pattern:
A trader who displays D style behavioural patterns is results focused, and competitive which makes them naturally good traders. They have a strong desire to be the best and will be driven to do whatever it takes to achieve that goal.
They need a lot of variety, action and seek out challenges, as they get bored easily. That means that a long term trend trading strategy is not suited for them, they need to be active traders either as scalpers or as swing traders.
Their love for adventure and adrenaline however will entice them to high risk trades. It is important for the D style trader to be engaged in activities outside trading that satisfies this need for adventures.
Under pressure they lack concern and get angry. This makes them prone to revenge trading which can develop into the ‘binge trading’ scenario described above. They try to recover their losses with force rather than waiting until the market conditions are suitable for their system again with high probability setups.
They are very big picture people which means that their most suited trading methodology are big picture price structures in a chart as they occur in harmonic ratios or supply and demand levels.
They are assertive within themselves which means that they have high self-confidence and perform best when creating their own trading strategy.
They recover quickly after a loss because they are not afraid of rejection, are not concerned with what other traders think of them, they are assertive within themselves. They pick themselves up and move on to the next trade leaving the past behind.
Whilst they are not very concerned about personal rejection, they do fear criticism of their work. When you ask a D style trader what their goal is, most of them answer they want to be the world’s best trader. They tend to be righteous and find it hard to accept if they have made a mistake.
Their decision making process is fast and it is criteria based. They will have to know exactly what they are looking for, they perform best when they have a checklist where they can tick all the boxes, and if that trade setup meets their criteria they will take it without hesitation or self-doubt.
Influencer behavioural patterns:
The I type trader is predominantly driven by the need to connect and belong that’s why whilst they are craving freedom they will not perform at their best when they trade on their own from home. A solution could be to join professional trading groups, a well-run online trading room where they can connect and interact with likeminded successful traders.
The trading methodology that is suited best for them is short term swing trading and maybe even scalping as they will find it hard to stay focused for long times and have a need for instant gratification.
Their natural decision making process is automatic with no criteria, meaning they make the decision if it feels good. No matter how great a checklist you put in front of them, they will rarely use it.
They get easily bored, find it challenging to follow rules and therefore look for variety, which makes them susceptible to gambling like trading behaviour unable to resist the urges and temptations that are so common in trading. They find it hard cutting losses as they will also take their losses on a gut feeling, when it feels good rather than following a predefined risk management strategy.
But being highly kinaesthetic can also be a strength. Once they have enough trading experience they can do really well trading based on their gut feeling.
Under pressure, the I energy will become highly disorganised, go messy in their head and will freeze when in a loss, unable to take their losses until the decision is made for them and the account blows up. They withdraw with a classic flight response, meaning they feel paralysed and unable to make a decision at all, but let the market make the decision for them.
Their greatest fear is rejection and that’s why they will most likely beat themselves up after having had a loss and will find it hard to recover from that loss and move on quickly. Being liked is really important to them and a loss will invoke in them the fear of rejection.
The danger is that they enter a trade because it feels good, not because it ticks all the boxes of their trading strategy. They also exit a trade because it feels good, which means they most likely find it hard to let a profit run, as taking the money feels better with the instant gratification. This makes them prone to impulse trading, being disorganised and cutting profits short.
They love to explore the boundaries of their potential and learn more about what’s possible – that’s meeting the variety need. That makes them prone to jump from one trading strategy to the next as they are great at starting things and find it difficult to follow through to the end.
Steady behavioural patterns:
Traders who predominantly have the S behavioural patterns have the ability to be patient and wait for great trade setups. They let the world happen around them and don’t get tempted to jump into fast moving markets.
They don’t like detail, but they don’t like big picture either, they want small chunks, they want to know immediately what’s around them so they would be best suited for medium term swing trading
Unlike the I and D energies they are not interested in pushing their boundaries. They like to keep things simple and look for certainty that they won’t make a mistake and that they will succeed. They can do well with adopting an already established and proven trading methodology.
They look for certainty and comfort and love following instructions. Once they have a step by step documented trading methodology with a checklist that they can follow to the T they will be doing well with trading as they are not prone to gambling and are very steady in their trading approach.
Unlike the D and I energies, the S traders rarely get caught up in binge trading, string of losses and account blowouts on the flipside large profits are also very unlikely for them as they highly dislike instability and conflict hence cut their losses rather quickly.
They are naturally calm and patient which makes them also great traders, they are not susceptible to impulsive trading, won’t have the urges and temptations the D and I energies are often victims of.
The flipside however is that they are indecisive, and fearful and therefore can miss out on many great trading opportunities that require a quick decision.
They also don’t adapt well to changing market conditions or highly volatile markets but can do really well in trending markets.
When it comes to the decision making process, they need time to think their trading setups through thoroughly. They perform best when they do their analysis after the market is closed or on the weekend, and then enter the trade the following day, when they had a chance to take time and process the information.
Compliance behavioural patterns
A trader whose behavioural pattern is within the Compliance energy is accurate, cautious and contemplative, they are logical and analytical, which makes them great analysts, but lesser traders.
They want to be right, driven by certainty. They are very structured, and inflexible as they don’t want to be wrong, which makes them best suited for a longer term trend trading methodology.
They want to be precise as their biggest fear is getting it wrong which may cause them to miss out on great trading opportunities as they much prefer to sit on the sidelines than being in a trade that they doubt.
Their decision making strategy will be based on a number of indicators in their strategy. The first indicator tells them there is a setup, the second gives them proof and the third level of indicators gives them the certainty to take that trade or not.
The decision making is very slow and they are credibility driven, which means they need to see the proof. They will not do anything unless they know it works because they are afraid they will get it wrong, that they will be critized by their peers. They want to have portfolios of information about how it works before they start trading at all. They need to see how other traders have succeeded, they love guarantees, they love to know there is no chance to fail.
The Next Step
Investigate your strategy on how you create losses (similar to the scenarios that I described above). You will realise that you repeat the same few mistakes over and over again. Then go through the behavioural patterns as described in the DISC profiles and relate back your strengths and weaknesses.
Once you understand why you do what you do you can go about creating a new trading future.
Use your natural behavioural patterns to design a trading methodology that is suited to your needs and preferences. You have also developed the self-awareness for your weaknesses and the next step is to either turn them into strengths by adjusting your methodology accordingly and also to adapt new more useful behavioural patterns to become a more capable trader.
“Though no one can go back and make a brand new start, anyone can start from now and make a brand new ending.” —Carl Bard
Would you like to find out what your natural behavioural patterns are? Why not take a psychometric assessment for just A$997. Please contact us here for further information or to book your session.