Loss of Control or Control of Losses?

I've been thinking more about losses and how we deal with them. It seems to me that an experienced trader asks himself, "How much could I lose today?", whereas a beginner wouldn't even contemplate the possibility. Unless the idea of taking a loss is already in your mind then if it comes to the point when you have to, to avoid the possibility of taking an even bigger loss, you won't be able to. If you have read my report (see sidebar for a copy), then you will remember about the work done by Kahneman and Tversky on loss aversion. Having already prepared for the possibility of getting out of a trade early with a small loss, if the market turns against you, then you are partial innoculated against loss aversion.

New Version of Bet Trader Pro

I fired up Bet Trader Pro today and it asked me if I wanted to download the latest version, so I did. It has been given a complete facelift and there have been some new features added. They are all listed here

There are some nice ones. Something that I wanted, when I first used the previous version, was the ability to quickly set stop losses and that is now in the new version. Have a look and see what you think.

Losing unconsciously

The more trading I do, the more I appreciate the advice about having a system, framework or set of trading rules to stick to. Successful trading is more than just being clever and knowing how to use your trading software, it is mainly psychology. By psychology, I mean it is about knowing your mind and taking control/managing your in-built natural reactions that, if followed, spell trading disaster. What in-built reactions?

We are wired to respond to the fear of loss and the threat of pain in a much more profound way than the potential for gain.

The mind is like an ice berg. Above the surface is the conscious mind. It’s the conscious mind we use every day for planning, analysis and making logical choices. The unconscious mind is like the larger part of the ice berg that lurks below the surface. Some people use the term subconscious mind or autonomic nervous system to refer to the unconscious mind. The unconscious handles a multitude of jobs which keep us alive and generally out of danger.

Have you ever been driving along at night? You’re zooming along, your mind mulling over the thoughts of the day, when WHOAH! Another car has pulled out in front of you. You don’t think, plan or analyse, you just turn the wheel and swerve. You come to a stop, safe, your heart is beating like a drum in your chest and your breathing is short and sharp. All those reactions were handled by your unconscious mind. If you had to think about it consciously, you’d be busy flying through the windscreen before you had decided to turn the wheel. The conscious mind is slow and deals with only one thing at a time, taking up to a half second to react. The unconscious mind handles a plethora of information simultaneously and instantaneously. The only problem is that this rapid response comes at a price.

Sometimes the automatic unconscious response is the wrong one in certain situations. In days gone by, feeling under threat and having adrenaline kick into your system and your body prepare for flight or fight would have saved your life. Nowadays, having to make a presentation in front of people can trigger the same response, leaving you feeling on edge, sweating and ready for combat! The same thing happens when trading, not that you necessary feel ready for combat but, our pre-disposed aversion to loss can make us let loses run.
The first step in getting around this is knowing why it happens. Using automated stop-losses can help, as it removes you from the equation (although I've not yet found any easy to set up and use stop-loss solutions in the software I have used). Other solutions involve tweaking the unconscious response in the context of trading, this would involve using an unconscious based technology, such as NLP or hypnosis. Another way would be to frame the trading situation in such a way that every trade is about protecting your bank (rather than making a profit), so the aim is always to focus on cutting losses. Working on the assumption that if the price swings away from you, it will keep moving away. Once you have closed the trade, then putting the last loss out of mind (so if the price suddenly bounces back, you don't start regretting following the system). The price will occasionally bounce back but in the long run, relying on that to happen is gambling of the worst kind and will lead to an empty bank.

Some great books on how the unconcious mind works are:

A book that goes into detail about how the unconscious mind has its beliefs installed and how to change them is (it can be pretty heavy going, so be prepared. It is very interesting and worth the read though):


The classic book on how our unconscious processes are used aginst us by marketers and advertisers and how to protect yourself:

Deflated bank

Bank: £62

I'm not a happy bunny. My bank is down to nearly half. What happened?

I took two £19 losses and made some little gains and a little loss (which could have been nasty, but I turned it around, just).

My first trade looked very promising. I got in early on an obvious trend. I was quite pleased with myself and was letting it run, when the moment of horror struck. I hadn't checked the software I was using properly before starting and had left on some automatic settings. Each of the backs I had put on had been getting automatically generated lays put on. I checked the matched/unmatched queues and saw several unmatched entries. I was rather exposed and after kicking myself for not paying enough attention I had to go full out to avoid a bad loss. I pulled it back but still made a small loss.

Next up, I did a couple of trades and made some small gains, then I had another bad one. I had put on a lay and was watching the price slowly rising, ready to get out if it turned against me when suddenly, in the blink of an eye, the price dropped a huge amount, at least ten ticks and I was suddenly losing. I sat in shock a couple of seconds, double taking the numbers I was seeing. Time was running out and I needed to take a fair loss and get on, but I didn't. I fell into the trap again. I sat there thinking it'll turn back. It didn't. I ended up letting the bet run and I lost. Stupid. £19 down on that. Okay, not a huge sum, but in proportion to the bank, it is almost 20%.

The final loss was again me getting myself in trouble by not understanding the software. I was making multiple trades on a race and had a few quid in the green. I allowed myself 3 ticks stop loss, which I was handling manually (mistake, I will do this automatically in future). The price moved against me and I hesitated, letting it roll passed my self imposed stop loss trigger (always stick to your rules. Lesson hopefully learnt (again)). After the price moved around, going up and down, with my heart rate matching it, it finally returned to my stop loss value and I tried to get out. I thought I had done it but when I looked at the stake, it was only half what it should have been. I had left the auto hedge fature on (changes the stakes so that you automatically get green ups) whilst having an unmatched back in the queue from earlier. It used the unmatched amount as part of its stake calculation. The price had then moved on again and I was still exposed. For some reason, when I make a silly mistake like this I act like the system no longer applies and once again I let the bet run and I lost.

Lots of lessons to take on board. One big one is that I can't always be trusted to stick to the rules I have set myself. How weird is that. When it comes down to it, in certain circumstances, I feel "above the law"! I hope now that I have noticed this, I can fix it. It's funny but all these reactions are covered in some of the books I have recently read, so it's not like it is new stuff (behavioural finance, kahneman/tversky, etc). It's just different reading and understanding it and then doing it. I hope this lesson is finally learnt. I think I will try and mechanise the process more, using software driven stop losses etc.