The No 1 Thing Successful Traders Do Differently

“The fear of losing money is the number one reason people lose money” John Templeton.

2010 was a challenging year for me – for personal reasons, and it had a harrowing affect on my trading performance. One of the best tools my mentor Steve Ward from High Performance Global gave me in 2010, was introducing the concept of critical moments into my performance analysis.

You see, losing trades don’t happen just out of the blue! They are usually preceded by a series of trades that didn’t work out the way you wanted and triggered the dangerous Feeling – Thinking – Acting (FTA) Loop.

You might have analysed a setup correctly, but felt unsure, you overthinkthings, second-guessing yourself,  and then you didn’t take the trade (acting = consequent behaviour) because in that moment you felt afraid to take a loss, or you had exited the previous profitable trade too early and then you saw the market running away without you and those uncomfortable feelings still affected you.

Critical Moments 

Unresourceful emotions can destroy wealth. Dr. John Demartini said: “Anything that you are infatuated with runs you and anything that you resent runs you. If you get elated and depressed about things, it runs you. It’s a vicious cycle.”

Critical moments are situations when you feel frustrated or angry or even tired, thirsty or hungry, and as a consequence of it you are prone to a lack of discipline, impulsive trading, etc. Once you identify that you just had a critical moment incident you can be pro-active and stop the vicious circle from getting set off at all, by either trade smaller positions and you will find it easier to step away from the trading desk altogether, as you know you are at a heightened risk of stuffing up.

Example: You have a good run, with a series of profitable trades, until one trade doesn’t work out the way you envisioned it. You notice you are feeling a bit tired after having focused intensely for the past few hours, and you know you shouldn’t get into the next trade. But somehow the last loss feels like an imperfection in the otherwise beautiful run, thoughts creep in that maybe you can make your money from the last loss back before you call it a day. Before you know it, you have entered a new trade, that trade turns into another loss, and now you feel compulsion, you need to get your money back, but you promise yourself, as soon as you are at break-even again you stop. Of course, it never works and usually ends up in what I call ‘binge’ trading.

And then, at some point you wake up, you are completely shocked at the havoc you have caused, and you’ve got no idea what came over you.

What happened was that the feelings cloud your judgment, the memory of the previous losing trade creates the frustration and the urge of wanting the money back. If the following trade is a loss too, it happens not just once but over and over again before it hits you, you’ve got to quit!

Once you started recording your emotional and thinking processes that create certain trading results, and you are tracking your performance, you will realise how you keep repeating the same mistakes over and over again.

If you investigate what happens just before you are having unnecessary losses due to a lack of discipline in trading, you will notice that feelings play a key role in consequent perception, judgment, decisions and actions we take in trading as they precede thoughts.

Even winners can lead to negative feelings. Most of the time, you either get out too soon or too late. Rarely does the exit of a winning trade occur at the top / bottom of the move. And unless you have mastered yourself, you will end up in some version of regret, totally missing the point of trading and thinking that you could have done better.

This experience triggers a feeling of regret and frustration which triggers impatient and impulsive behaviour ‘jumping’ into the next trade.

The first impulse trade you take doesn’t mean anything, if you knew how to get yourself back into balance and cut it immediately, it would have a small if no impact at all on your end of month results.

But it is what you do with the impulse trade that has the greatest impact!

Without even realising you will have rules around losing, such as a losing trade has to be made back instantly, with the next trade, in the same contract. And this leads to more undisciplined behaviour and more losses.

So the cost of untaken or poorly executed trades is not just missed out profits; worse, they are setting the stage for undisciplined behaviour and a vicious cycle of emotionally triggered losses on the back of it.

The best action you could have taken is to resolve the emotional gridlock before looking for the next trade setup. Otherwise after you made a stupid trading mistake fuelled by impulsive behaviour you are likely to punish yourself with more unnecessary losing trades.

Fear doesn’t feel good nor does anger, but that feeling that you made a mistake and there isn’t anything you can do about it, you can’t go back in time and change it. You are powerless to change the past and feeling powerless either leads to feeling depressed (fight response) or to the urge of trying to get your power back by putting on more trades (flight response).

If you are mad at yourself and you are not releasing the energy by articulating those feeling, getting clear about what is going on internally and then releasing it with trading unrelated activities, such as going for a run, playing computer games, going to the gym to release the physical energy of the frustration, you will release the energy of feeling bad about yourself by taking it out on your trading account.

The question however beckons, was it really your ‘bad’ feeling that was proven right or, did your feeling bad, turn into a self-fulfilling prophecy and cause the losing trade?

How would the trading day have turned out if you had taken a moment right at the beginning when you started noticing the slightest feeling of discomfort, dealt with it until you feel balanced and complete again, maybe that trading day would have turned out to be a super profitable day?

Examples of critical moments that lead to self-defeating trading behaviour:

  • When I considered to get onto a trade, but didn’t and it then turned out to be a great trade – sense of regret, having missed out.
  • When I was in a profit that turned into a loss because I followed my rules.
  • The magic number seems to be 3. I can take my losses 3 times and the fourth time I let it run into the abyss.
  • When the market rallies up without me and I missed out on the move. Driven by the feeling of having missed the first big move, I will start looking for short entries, put my stop outside the reversal candle just to be taken out because the strong rally continues.
  • Got out of a trade and it keeps moving, I calculate in my brain how much more I could have made and feel the bitter pinch of regret because I missed out on profits.
  • After a string of profitable trades I get Superman syndrome and start getting sloppy.
  • When I have a disagreement with someone I care about.
  • When I am feeling out of integrity because I didn’t keep my promise.
  • When I or a loved one have health concerns.
  • After sudden financial pressure with an unexpected expense.
  • Seeing trades setting up but not taking them because they are not ticking enough boxes of my trading system and then price moves exactly how I expected it. Once again bitterly counting “the dollars that could have been in my pocket but aren’t”.
  • Trading when I am tired. I know I am tired and know I shouldn’t trade, but hey there is this great setup, or hey I need to make money because I have bills to pay. Even though I know that being tired makes me take on more risk. And once I dug myself into a hole, being more tired and annoyed, I start making even riskier decisions. I overtrade.
  • Trading after having had an unresolved disagreement with someone or even the phone company. Makes me feel powerless because ‘they don’t want to see my viewpoint’, and so I try to gain my ‘power’ back by entering a trade, which of course is just an illusion of power that fades very quickly when I realise the trade is most likely to end up in a loss.
  • Losing traders have the belief that trading losses have to be made back not just eventually but immediately, preferably in the same contract at similar price levels and in one trade (because they want to stop feeling bad).
  • Successful traders are aware that their brain is naturally wired to think this way and take charge by consciously taking the account balance as the new starting balance to make profits from, stay away from contracts they have recently incurred a big loss in, and keep reassuring themselves that losses don’t need to be made back straight away, that there are plenty of opportunities over the coming days, and to only take the profits the market offers, instead of hoping for a single winning six trade where they recuperated the whole loss and more. That would be trading a fantasy, but they know they have to be realistic..

Eventually, the information you gather about your own personal FTA loop can be read like technical analysis on a price chart. Once you understand it, you have developed the self-awareness to notice the slightest shift in attitude long before it could become detrimental to your trading; you will be able to read yourself, your feelings and thoughts so accurately that you can inoculate yourself from the likelihood of bad trading decision and so reduce the amount of losing trades. It dissipates the urges and temptations, leaving you free to choose if you should trade or take a break, if you are a high probability setup for profitable trading behaviour in that moment or not.