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Dorn: Yes, Traders Do Want to Lose

No profession requires more hard work, intelligence, patience and mental discipline than successful speculation…Robert Rhea (The Dow Theory)

Back in the day when I first started to trade, I was shocked silly when people talked about losses! Say what? LOSSES??

I remember looking at some sites that I now know were transparent — and they always listed losing and winning positions. I didn’t like the idea of taking loses, so I fell for the hype that I was getting from ruthless promoters who only talked about their wins (conveniently forgetting to mention their losses.)

I could not accept that a trading method would have losses built into it.

It was the same as telling me that six out of every ten of my patients would die within a short period of time. Because of my perfectionism and brain bias against losing trades, I struggled for a long time to make money in the markets and ended up with more losers than winners.

Was I self-sabotaging? Yes.

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Oliver Quilla for CNBC.com

It is estimated that some 50% of all traders have a subconscious desire to lose.

This is a remarkable figure, but I see it over and over again in many traders—including my former self.

(I didn’t know how incompetent and self-defeating I really was until I finally found a great coach to help me.)

In some ways, it was worse than self-sabotage.

I was attempting to use the same type of thinking that brought me success as a medical doctor (trying to heal everyone and make it all better) to making money in the markets. I kept hurting myself by losing more money.

Perfectionism is the enemy of good trading.

Those of you who have traded for even a short time know that there are no guarantees. No one wins 100% of the time; rather, we are always dealing with risk and reward. In our live trading service at www.thetradingdoctor.com, we scan constantly to find trades with high probability risk/reward parameters. Once you truly embrace the reality that there is no reward without risk, you are on the road to becoming a successful trader.

There are two major psychological aspects of the risk/reward concept.

Although they may appear to be similar in nature, they are not. The first involves doing things correctly. This means making a trading plan and following it with total discipline. As easy as this seems, this is where traders struggle the most because it takes work like keeping a written trading journal as an honest inventory of your thoughts, feelings and actions during the trading day. Not keeping a trading journal is similar to a businessman who does not keep up the books for his business. How long do you think such a business will survive?

The second aspect of the risk/reward concept is avoiding mistakes.

We are all human and make mistakes, but there is an upside to this. You benefit from studying your mistakes and then doing everything possible not to repeat them again. This is how we grow and develop -- both as traders and in life.

We learn through our mistakes—often more so than by doing things correctly.

It is through making mistakes and accepting them with rigorous honesty that we accumulate regret. This regret is a form of personal responsibility that then drives us to make a firm commitment to never repeat that mistake again.

The two practical principles that help anticipate and mitigate making mistakes are self-discipline and personal responsibility. They are related!

Personal responsibility plays a significant role in trading success.

This is because you have choices and you are responsible for your thoughts, feelings and actions in the markets. You make and accept the decision to enter or leave a trade. If you don’t, it’s like jumping out of an airplane with a defective parachute, hoping that it will start working before you hit ground. Don’t be like the mediocre swimmer heading into shark-infested waters because you sees a lifeguard on the beach and believes that you will be rescued if needed. In the markets, you are your own parachute and your own lifeguard. No one is going to save you but you! The power of personal responsibility in trading cannot be taken lightly and should be a bedrock belief. Personal responsibility is achieved through diligent practice and self-reflection and incorporated into your trading plan.

The basic questions to ask are:

  • Has anything changed from my original trading plan?
  • Has the technical pattern (or company profile—if trading on fundamentals) changed from the time I entered the trade?
  • Has my initial price objective changed?
  • Has my stop been hit?

These four questions should be written at the top of every page in your trading journal because they remind you that you are responsible for every aspect of your trade. If the answer to any of these questions is "Yes," then it is your responsibility to manage the trade.

As you can see, personal responsibility is the foundation for self-discipline.

Thinking about losing or winning requires discipline. By adopting the practice of focusing daily on your trading journal and the four questions above, you manifest discipline. Analyzing your daily trading journal is the best way to spot mistakes and see where you have acted impulsively, impatiently or allowed your rat brain to take over. Taking personal responsibility for any mistakes and then being disciplined enough to avoid making them again is among the quickest way to achieve lasting trading success and to stop hurting yourself.

Order marches with weighty and measured strides. Disorder is always in a hurry…Napoleon Bonaparte

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Dr. Janice Dorn is the only Ph.D. (Brain Anatomist) and M.D. (Board-Certified Psychiatrist and Addiction Psychiatrist) in the world who actively trades, writes commentary on the financial markets and manages a subscription-based website. Dr. Dorn has been trading the gold futures markets full time since 1993. She has written over 1000 articles on trader and investor psychology, and mentored over 600 traders and investors.She writes on all aspects of trading psychology and provides a real-time trading service on her website: TheTradingDoctor.com.