This is Why You Take BIG Trading LOSSES (and How To Fix It)

Have you ever broken your trading rules and instead of closing a losing trade for a small loss, you've left it open and ended up with a much bigger loss? If so, you've got a secret gambling issue that you didn't even know about. Welcome back everyone. This is lesson two in the miniseries for high performance trading and I think you're going to find this interesting and very helpful. Saying you've got a gambling issue is not clickbait. You really do and so do all healthy human beings. It's hardwired into us. Unfortunately, it causes problems when you start trading. Let me explain. When you are in a trade that goes against you into a loss, your system rules probably say, accept the loss, take it. Loss is a part of trading, move on. But you don't stick to your rules. Your inner gambler takes over and forces you to take on much bigger risks. It's not fear. Let me explain what's happening and then show you how you can fix the problem in your trading. Whenever we are losing, we become risk seeking. If you think of sports teams when they are losing, they start to take chances. They make the riskier plays, like throwing the Hail Mary pass and hoping it works. It makes sense. What have they got to lose? They are already behind, so they may as well take a chance. And if it pays off, they go from losers to to winners. Gambling is their best option. This tendency goes all the way back to our early ancestors. If they were starving to death and about to die anyway, they may as well take the risk of stealing from a neighboring tribe or trying to take down a huge woolly mammoth. They're already behind. They've got nothing to lose. Taking a gamble is their best chance of survival. We've all inherited that behavior. You'll notice this is the exact opposite of what I talked about in the last video about letting winners run. When we're ahead and already winning, we become risk averse. We avoid it. We want to play it safe, be cautious and protect what we already have. That's why we take profit early. But when we're losing, we become risk seeking. We want to gamble, take chances and try and gain more than we currently have. That's why we move our stops to try and recover. The thing traders most often attribute this to is fear. Fear of losing. That's not correct. And this is a fascinating and unexpected twist about losses. Far from being afraid, you're actually really optimistic and positive. Let me explain again. Go back to your ancestors when they were hungry. If they were fearful, they wouldn't take risks. If they looked at their situation logically, they would realize they were weak, tired, lacking energy, and probably didn't have the strength to hunt that dangerous mammoth. Common sense would tell them to be afraid. In their current state, they've got very little chance of winning. It's too dangerous and the odds are against them. But if that's how they thought, they wouldn't take the risk. But if they don't take the risk, they will definitely die. So the brain has a clever solution. It tricks them into into being optimistic. It keeps the real facts hidden from them and convinces them not to be afraid and to actually massively overestimate their chances of success. And this is what it does when you are trading. When your trade is in a loss. If you were genuinely afraid, you'd be even more afraid of the loss getting bigger. So you would easily stick to your rules and take that smaller loss. But you're not afraid. Your brain tricks you into being optimistic. It makes you overestimate your chances of turning this loss around and backing to being a winner. And it does this by using memory recall and prioritization. Just as I explained in the previous video, but of course this time in the opposite direction. Here's how it works. You have two sets of memories of being in losing trades and moving your stop loss. On the one hand, you have memories of the times you moved your stop loss and and then the trade continued. It inched you and you ended up with an even bigger loss. This is a negative outcome. And then you have the memories of the times you moved your stop loss and the price turned around and came back into profit. This is a positive outcome. So the next time you're in a losing position, you have a choice. Do you move your stop loss or not? Well, the choice is dependent on what you think is more likely to happen. But what you think will happen depends on what you can recall from memory. And in a losing situation, your brain prioritizes positive outcome memories. In other words, it serves up a disproportionate number of memories of the price turning around and coming back into profit. It's one sided information hiding the true facts. So you now begin to think that reversals backing to profit happen more often and are more likely. And of course in that case you will want to move your stop loss. That just makes sense. And now your brain reinforces this decision by serving up even more memories of the times you moved the stop and the trade ended up as a winner instead of a loser. All in. You're feeling much more optimistic and positive about Your choice. The evidence your brain has given you clearly makes taking a risk and moving your stop the best decision. Fear is not the issue. Just as I explained in the last video about letting winners run, what's happened here is a runaway decision flow. It's a cascade of automatic thoughts that lead to one predictable and inevitable decision. Once again, you're on autopilot. When you're ahead and winning, the course of action that is in the best interest for your survival is to play it safe and look after what you already have. So your brain does everything it can to make you take that course of action. When you're losing and behind, the course of action that is in the best interest for your survival is to take risks, gamble, do anything you can to get out of the hole you are in. So your brain does everything it can to make you take that course of action. Now, before I move on, I want to stress that none of this has anything to do with you making mistakes or or indicative of poor discipline or bad psychology. There's nothing wrong with you. In fact, what we typically refer to as trade in mistakes are proof that you are working just fine and healthy. The issue is that when your brain developed its understanding of risk and danger, capitalism didn't exist. So it's not very good at telling the difference between the risk of losing and winning a few dollars compared to the risks associated with life and death. Your survival instincts are amazing. They're just maladaptive for the trading environment. And the solution is not to have more discipline or control your emotions. It's to retrain your brain so that it's an asset for your trading. And we start that process using the same technique that I explained in the last video. And just to clarify, this is just a beginner step. Later videos in this series will give you much more information and comprehensive strategies, but this is a good starting point. Step one is to have your trading system clearly written out as a plan in front of you every time you trade so you can be certain what your rules are. You've got to be able to remind your memory of exactly what your rules are in the first place to try and stop the cascade's decision flow before it even starts. Step two is keeping your trading journal up to date and log every single trade. And you use this to make a note of all the times you ignore your trading plan and move your stop loss. Then step three is a review. Go through every trade where you broke the rules and you moved the stop and count how many times the price carried on for a worse loss and how many times it reversed back into profit. So you have an accurate number of each. It's as simple as a tally of 20 on one side and perhaps 30 on the other. What you're really trying to do here is re educate your long term memory. You're trying to counteract the ease by which the positive outcomes are prioritized and recalled and rebalance the memory memory recall you have the next time you're in a trade. And then step four is to calculate the profit and loss you actually have versus what you would have got had you stuck to your system. Again, it's re educating your brain with cold hard facts in black and white. You need to train your brain to deliver accurate facts, not one sided. This kind of post trade analysis, which should absolutely be part of your regular trading routine, is going to build a database of evidence and memories that your brain can accurately recall and present to you in your next trade. Over time this will help you develop more self awareness as you trade and take you out of that autopilot. Next time you're trading and you're considering either overriding your trading plan to close the trade early or to move your stop loss, notice the opposing thoughts that are in play. In a winning trade, you'll notice that you are more likely to remember the negative outcomes and think that the trade will reverse against you. But in a losing trade you will notice that you are more likely to recall positive outcomes and think that the trade will reverse in your favor. Just having that self awareness and recognizing the conflicting thoughts and decision processes you experience under different circumstances is the first major step on the road to recovery. I hope you've enjoyed this video guys. If you have please like comment and share. And if you're not already, please consider subscribing. And remember there are another six videos in this series so please keep your eye out for part three and click through to watch that as soon as it's available. Thanks for watching. I'll see you next time.