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So, You Made a Mistake…

John is kicking himself right now. He just made an unexpected losing trade and he feels especially down. He expected to make a killing, and he was looking forward to winning and celebrating big. He thought he had done everything to prepare for the trade. He had looked at the moving average to discern the trend. He looked at the highs and lows of the stock for the past two months, and set his stop loss accordingly. But in his strong desire to believe that he was about to execute a winning trade, he made a fatal error: He forgot to account for an upcoming earnings report. The company failed to meet analysts' forecasts, and the stock fell hard and fast. John didn't lose too much. His protective stop saved him, but it still hurts. He had gotten his hopes up, and now, he is especially disappointed.

John's situation is common for both seasoned and novice traders alike. There is a strong human need for eternal optimism. John isn't naïve. He knows that earnings reports can unexpectedly impact a stock price, but he had wanted to make a big winning trade so desperately that his unconscious mind prevented him from seeing matters clearly. Sometimes, we want something so strongly that we see things that just are not there, or we shut out things that we don't want to see. That's what John did. He didn't look carefully at all possibilities and he missed the obvious.

Why does John feel so badly? It could be for a number of reasons. First, he got his hopes up, but his dreams were dashed. When we expect a big win, and don't get it, we are especially hurt. Second, John may be trying to live up to his own unrealistic, perfectionistic standards. He may be beating himself up because he wrongly believes that he must trade to perfection; he must account for all possibilities. It is a fact that had he been able to see that an earnings report was scheduled, an obvious potentially adverse event, he would have saved precious trading capital. But mistakes do happen. We are human. We often let our emotions take over, and when that happens, our rational mind doesn't stand a chance.

How can John feel better? He needs to change his frame of reference. When many people make an obvious mistake, they let their superego rule. Our superego consists of the ideals we strive for and the moral rules that our parents taught us while we were youngsters. When many people make a mistake, they treat the situation as if a parent or teacher were scolding them for breaking a rule. They re-experience feelings from childhood, hurt, beaten feelings. In some cases, the feelings may be shame or guilt. This is the wrong frame of reference to use to understand trading setbacks, however. When you lose money on a trade, it is not useful to allow your unconscious to equate the loss with being punished by your parents for breaking a rule. Instead, it is important to look at matters from the perspective of a trader. Traders are human and they make mistakes. How many people actually make a living as a full-time, active trader? Hardly any. If you work under the assumption that anyone can trade, you may be in for a nasty surprise. 



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Sunday, 21 April 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.