Whenever I hear a trader tell me:
“I am 100% sure that the stock is going up.”
I know that there are some flaws in the thinking process.
The stock does not 100% need to go up.
The market does not 100% need to do anything.
The market does not need to do anything you think it needs to do.
Contents
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- Introduction
- Doubling Down
- The Proper Way To Think
- How Certain Can Direction Be Predicted?
- Conclusion
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Introduction
Even the best directional traders get the direction correct only about 60% of the time or less.
So, as with most things in life, nothing is 100% black or white.
Everything is somewhere in between.
That “in-between” is around 40% to 60% in a very efficient market.
Many would argue that the direction that price will take is about 50/50 — like a coin flip.
But let’s just say that there is a directional tendency based on patterns.
Then you might say there is about a 60% chance that the market may go in one direction and a 40% chance that the market may go in the opposite direction.
Have you ever caught yourself thinking of saying:
“This stock has gone up so much. It cannot go up any further.”
That, again, is a flaw in thinking. Of course, the stock can go up further. The stock can do anything.
What about this one:
“This stock has fallen so far. It simply cannot fall any further.”
Many times, right when those words are uttered, we see the stock fall further.
It is the trader who thinks that it cannot fall further that gets themselves into losing money.
They cannot see the other side of the coin because they stick with a position for too long when the evidence is against them.
Doubling Down
“Doubling down” is likely one of the worst things a trader can do.
This is when they buy a stock at a certain price.
The price falls, which means that they lose money.
But they convince themselves that the price is less expensive now.
It is a good deal.
So they buy more of that stock.
It is like saying they are wrong in the position, but they are still sticking to the position.
In fact, they are adding money to the position.
Psychologically, doubling down for those who do not like to be wrong is very tempting.
By doing so, the trader who is wrong has the probability of proving himself or herself right again.
While this kind of thinking may work occasionally, it is a very dangerous way to think because it can lead to the risk of ruin.
The Proper Way To Think
For the case of a stock trader trading on direction, the correct way to think would be something like this:
“I think there is a greater chance that the stock will go up than to go down.”
Or they can think this way:
“There is about a 60% chance that the stock might go up and a 40% chance that the stock might go down.”
And if the trader is confident, they might think:
“There is a 70% chance that the stock will go in one direction and a 30% chance that it might go the other direction.”
Rarely would I say anything with over 80% confidence.
I’ve looked at many technical indicators, chart patterns, and candlestick patterns.
I have never found anything that gives me anything close to 80% accuracy in predicting direction.
If you have, let me know because I would also like that holy grail.
You need to reframe your thinking. Instead of thinking the stock has to go up, you have to think the stock is likely to go up.
If you are like most people, you do not like to be wrong.
If you think the stock has to go up and it’s not going up, then you are wrong.
And we don’t like to be wrong. We hold on to that wrong position for too long to not be wrong.
Therefore, if you reframe your thinking to say there is a 70% chance that the stock will go up and a 30% chance that the stock will go down.
Then, if the stock does go down, you are not wrong.
You are, in fact, correct that the stock had a 30% chance of going down and that 30% happened.
This kind of thinking does not lock us into a particular position.
We can more easily switch our position.
Being mentally flexible to switch our position is a very good skill to have in trading.
It means that we do not hold on to losing positions.
We adapt to the market and the changing conditions.
In trading, you need to be able to see both sides of the trade.
Whenever you think a stock is going to go up, there is another set of traders that thinks the stock is going to go down.
If they did not exist, you would not be able to have bought that stock because there would not have been any seller to sell that stock to you.
I once heard a pro trader say that to know when to buy, you need to think in the sellers’ minds.
When you realize this is when the sellers would have given up, this is the time to buy.
So, you have to think of the opposite side of the argument to see when your side would be correct.
How Certain Can Direction Be Predicted?
Is the trader telling me that they are so good at predicting direction that they are 100% certain?
Only novice traders think this.
In fact, the more experience the trader has, the less likely they are to think this.
Experienced traders know they are never 100% sure of anything the market will do.
They are prepared to take action regardless of whatever the market does.
If you’re 100% sure that the market is going in one direction, then you are not prepared to take action when the market goes the other way.
As an example, a trader might be bullish on a stock because they see a piercing candlestick pattern.
But there are sellers trading in the opposite direction.
Perhaps they are selling because the stock broke support of that 50-day moving average.
There are traders on different timeframes.
So, yes, the market may be bullish on the daily chart.
However, it may be bearish on a lower timeframe (such as the 15-minute chart).
Our particular time frame is not the only time frame that exists.
We often forget this.
There are longer-term traders buying and selling for completely different reasons (such as fundamental reasons and not even looking at the chart).
They are looking at the balance sheets.
Direction is hard to predict because the aggregate of many different factors and traders determines it.
Often, traders are convinced of their convictions because they see only some of the factors that determine direction.
They are not seeing all of the factors.
In trading, you have to be aware that there is a possibility of you being wrong.
If you are unaware of this possibility, you will be holding on to a losing position for too long, which is how people lose a lot of money.
In fact, good traders are wrong quite often.
They are good only because they can quickly detect that they are wrong and change or exit their position.
There are CEOs and top executives who excel in their particular fields.
And they are used to the fact that they are often correct.
That may work in their field. But when it comes to trading, it may not work so well.
The marketplace is a humbling place.
The top CEO is just another one of us.
Do you know people that think they are correct 100% of the time?
That idea in and of itself is wrong. which makes it such that people who think they are correct 100% of the time cannot be correct 100% of the time.
Conclusion
So, to be a successful trader, you need three things.
You need good risk management.
You need a good strategy.
And you need proper psychology, which I hope this article will bring you one step closer.
Am I 100% sure of this? No! I’m not 100% sure of anything.
However, it is what I feel it is likely to be.
Yet, it need not be.
I always think that I can be wrong.
It is okay to be wrong. It is not okay to stay wrong.
We hope you enjoyed this article on why traders are losing money in trading.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
Original source: https://optionstradingiq.com/losing-money-in-trading/
