There are two fundamental fears shared by most traders: the fear of not being right and the fear of losing money. These fears are fed back into a kind of dance that destroys their accounts, let’s see how.
On the one hand the trader does not want to make a mistake, for most traders it is important or very important to get what they do right. They have carried out an exhaustive analysis, weighed the information, assessed it and established scenarios, and finally, by contextualizing this information, they are willing to make a decision: they are going to sell a certain market.
Now, how far can you be certain of your prediction? The market may respond as indicated by its analysis or it may do so in a completely different way. In one case they’ll make money and in the other, they’ll lose it. Is it not logical, then, that his wish is to be right? If they’re wrong, they’ll lose money, right? And losing money is something they’re also afraid of. They don’t operate to lose money. They don’t want to lose money.
Making mistakes and losing money are two fears that go hand in hand: one reinforces the other.
Imagine you have identified a market by creating a range. The price goes to the top of that range and your system tells you that it is best to sell. At the top of the range you can manage your risk very clearly: if the price instead of falling breaks the top of the range and follows its upward movement your hypothesis will be invalidated and you will have to leave, instead if the price goes back according to what your analysis predicts you have traveled to the other end of the range which gives you a relationship between the potential risk and the profit of 1 to 4. You know you want to participate in scenarios like this: clearly defined risk, clearly favorable profit potential, well defined and unambiguous structure, favorable context.
Open your shorts and proceed to place your stop orders above range. If the price reaches that level the hypothesis you have established will be invalidated and you will have to assume a loss.
Now, if you are a trader who doesn’t want to make a mistake, who wants to be right, it is very likely that your mind will do the following trick to you, which you should know and anticipate: You expect the price to fall, that would confirm your hypothesis, give you the reason and allow you to make money. Imagine that the price, once you’re in the market, instead of falling, starts playing with the top of the range, it doesn’t fall, but it doesn’t pierce it upwards either. You want me to fall, because that would validate your work, but it doesn’t. A moment later, the price pierces the resistance and begins to move against you, not with speed, but slowly, some ticks up and some ticks down, some ticks up and again down. You might notice how your emotional charge increases if you weren’t so committed to your investment, that you only have eyes to watch every tick the precip makes. But your mind, which keeps you watching the price swings, will distort your perception. You want the price to go down, so every small downward movement has a “very big” importance. An importance that you give, an importance associated with the idea that this movement favors your objectives. And the opposite, every upward movement, against your positions, is underestimated, you don’t want it to happen and, in fact, you may “deny” it, you may mentally give it less importance than it has. An upward movement denies your analysis, takes away your “reason” and makes you lose money.
But you don’t want to make mistakes or lose money, so you’re still in that mental trap where you “see”, literally “see”, the little moves in your favor are more important than they really are, and the ones that go against you are less important.
Imagine that the price keeps scratching upward ticks, you know what level your stops are at and you know that if the price reaches that level you will have to assume a loss, but you have done a good analysis, the price “must” fall, it is at the top of a range that has been validated and will most likely end up returning to the bottom of the range. And as you watch the price approach your stops, without knowing exactly how, you find yourself moving those orders: your hand, in an almost unconscious movement, has moved those stop orders away and away a bit. Now, your internal dialogue justifies your behaviour, if the price touches your orders and then falls you will have left with a loss and then see how the price does what your analysis indicates it will do and you don’t want to accept that. Your analysis is correct, so you think it’s more reasonable to slightly “delay” your stops than to let the price sweep you away.
At that moment, there are two opposing ideas in your mind. On a certain level, you know that your stops are the way you defend yourself against the uncertainty of the market, they are your insurance policy and work to your advantage, on the other hand, you don’t want to lose, on a certain level you know that you should leave them where you put them, because that is the place that your risk management system establishes in your trading, but, on the other hand, you don’t support the idea that the price will sweep you away and then do what you anticipated. On one level, you know you have to let the price touch the stops, on another level, you don’t want to.
These two ideas fight each other and generate cognitive dissonance, so your mind, in order to allow them to live together and to alleviate the emotional activation that this produces in you, generates arguments in favour of your decision, whatever that decision may be.
If you decide to touch your stops your mind will fabricate a justification: The price is at the top of the range, the range has been validated, the lack of volume in upward movements signals lack of buyer interest, you have seen several candles closing far from maximums, the context favors a downward movement. Professionals could make a new maximum to go “hunt” your stops and generate liquidity there that would allow them to increase their short films and it would be absurd to let them steal your stops if not more. It is better to move them slightly away, just a little bit….
On the other hand, your mind will continue to distort your perception of the price action because at that point you are already emotionally compromised: every little downward movement will renew your hope and every upward movement will be belittled.
Now, the price keeps rising and you see how your hand moves your mouse and dilates the stops a little more. Now you can no longer let the price touch them, the movement against your positions is too great and the loss you would incur too costly. You are convinced that now the price is about to turn and, at this moment, it would be absurd to come out with a loss. Your analysis is correct, the price will move downwards sooner or later, so why let your stops jump and lose money if you can hold out a little longer?
The battle you wage is between two fears: the fear of being wrong and the fear of losing money. Just remember that. If your biggest fear is making a mistake, if what you fear most is not being right, you will stay in that position and continue to delay your stops. Your mind is convincing you that you’re right, that your analysis is correct.
But open your eyes. Your analysis may have been as accurate as an analysis can be and that does not mean that the market will do what your analysis indicates. An analysis is just that, an analysis: an assessment in the form of a probability distribution. Your analysis can be perfect but the market can do anything at any time – The price movement is the result of the interactions between the participants who make up that market, it is not the result of your analysis.
But your mind won’t let you see if you’re afraid of being wrong. Your mind will dispose of the information in a distorted way and you will continue to believe that you are right, not because you are right, but because the elements of judgment that you will be valuing will be only those that favor your intentions.
If you are convinced that the market will go down, and you can’t stand the idea of being wrong, your mind will help you by focusing your attention on those informative elements that favor your judgment, and you will stop seeing what goes against your opinions. The range was validated, but the price is closing well above that level of validation (you don’t want to see that). The price has made downward closing on several candles, but each of those candles had a maximum upward, and a minimum upward (you don’t want to see that). The volume does not increase in the upward movements but neither does it increase in the downward ones (and you don’t want to see that either).
Your mind is helping you see what you want to see. You’ve lost your objectivity and are no longer with the action of price. You have disconnected from reality to tune into a station, which validates your opinions.
What will happen, as long as your fear of making a mistake is greater than your fear of losing money, is that you will be delaying your stops and, if the price continues its upward movement, there will come a point where the tables will turn and your fear of losing will be greater than your fear of making a mistake. At that point, the calculation of what you are going to lose gives you a figure so frightening that it exceeds your desire to be right, and then you will accept the loss, walk out of the market and realize how absurd your behavior has been. That is the breaking point, the point at which the loss is so great that it outweighs your desire to be right.
With the loss in your account, with your heart aching and your self-image beaten you will be able to see objectively the information that has always been in front of your eyes, but that had remained invisible to you. The price has long been on an uptrend, the range has long since been invalidated, and what you have done is wrong. You should have left your stops at the place you set up in advance, after all, that’s what your system sets up. You know perfectly well that this is the right way to operate and you know it’s not the first time you’ve made the exact same mistake.
No one wants to lose money and no one wants to make a mistake, but as a trader, you cannot base your trading on psychological needs. You can’t operate if your head is not furnished properly. You are not in a position to trade if you have not got rid of those obstacles.
What difference does it make which system you use? Do you think you would have done better with another system? Do you think another system would have kept you out of the market? The problem’s not in the system, it’s in your head.
Maybe trading isn’t for you. Maybe you should reconsider. Tell me, how much more pain are you willing to endure, are you still determined to be right, have you not just seen that it is this irrational desire to be right that is interfering with your chances of success?
The you who does not want to make a mistake has no chance of success in an activity based on uncertainty. That doesn’t mean you can’t trade, it means you have to transform before you trade. You must resolve the internal conflict you have so that you are not the obstacle to your success.