How to overcome loss aversion

[arbitrage16]

Loss aversion is an issue I am struggling with. If I take a red trade, this will impact my mindset for the trades that follow, I will become cautious and hesitant to enter, or if I take a red I will then switch quickly to another runner to try to make it up.

Curious to know how people approach overcoming this issue, or how you have been able to move past it, thanks.

[sa7med]

Loss aversion is an issue I am struggling with. If I take a red trade, this will impact my mindset for the trades that follow, I will become cautious and hesitant to enter, or if I take a red I will then switch quickly to another runner to try to make it up.

Curious to know how people approach overcoming this issue, or how you have been able to move past it, thanks.

Don't try to make it up. If you have a valid edge then just keep doing what you're doing, over time it will be made up. Don't think anyone here has a 100% strike rate. If you're going to be emotional after a loss, perhaps stop trading and try to figure out what went wrong and only continue once you've figured it out. If you're still too emotional, perhaps try and set up some automations. Whats good about machines is that they dont get emotional. Good luck!

[eightbo]

Gradual exposure linked with self-awareness over time. Explore why the perceived pain of a trading loss affects you emotionally and make an effort to contrast that with a raw, probabilistic view of effective trading decisions.
In my opinion, your goal should be to achieve a perspective where you truly believe taking the loss is the best thing for you at that particular moment in time. When you really believe that, accepting losses will become the non-stressful option.

Do some research into reality vs. expectations as well. Often we feel pain or perceived when life doesn't play out like we thought it would and the disconnect can lead us to feel threatened. If I plan a day out and expect a nice sunny day and it starts heavily raining on the day I'm open to disappointment. However, if I have a plan for all weather types then I might be slightly annoyed but I was emotionally prepared for that outcome some time ago and the disappointment is drastically less so.

Lastly, have a deep think about the concept of actually wanting to get good at losing; why you might want that and how it could ultimately affect your results.

Alternatively, I know it has helped some to reframe losses into "trading expenses", a cost of doing business if you will.

[henbet22]

Try the book The mental game of poker by Jared Tendler. It helped me a lot. Also to echo above post re expectations..... Expect to lose..... you react better when it happens....

[ruthlessimon]

Loss aversion is an issue I am struggling with. I take a red I will then switch quickly to another runner to try to make it up.

Curious to know how people approach overcoming this issue, or how you have been able to move past it, thanks.

If you can, it's really worth drilling down, & defining your strategy in objective pieces - & either automate it, or track it in a spreadsheet

(To me a good strategy is something that's mostly numbers & symbols!) - i.e. can be rigorously tested

Crude, but it will protect you against such biases

I'm doing this with one of my pre-race strategies atm. Key metrics I currently track vs. my "botted version"

1. Missed fills
2. Early manual fills
3. Manual exits

Arguably I shouldn't even be manually trading this one!!!

My exits are worse; when I offer it wins; & when I punt a revenge/bored trade, I lose!

Why data is so useful

[to75ne]

Loss aversion is an issue I am struggling with. If I take a red trade, this will impact my mindset for the trades that follow, I will become cautious and hesitant to enter, or if I take a red I will then switch quickly to another runner to try to make it up.

Curious to know how people approach overcoming this issue, or how you have been able to move past it, thanks.

you might have to face a fact that you might not like and cant overcome (not without professional help) your brain may not be wired in the best way for trading, it is not something you have the wiring for, and hence will always struggle with loss aversion.

[arbitrage16]

Try the book The mental game of poker by Jared Tendler. It helped me a lot. Also to echo above post re expectations..... Expect to lose..... you react better when it happens....

Fantastic recommendation, seriously. Devoured this book in a couple of days, watched some of his presentations and very much looking forward to reading book 2, as well as his trading book that he has coming out next year.

[arbitrage16]

Gradual exposure linked with self-awareness over time. Explore why the perceived pain of a trading loss affects you emotionally and make an effort to contrast that with a raw, probabilistic view of effective trading decisions.
In my opinion, your goal should be to achieve a perspective where you truly believe taking the loss is the best thing for you at that particular moment in time. When you really believe that, accepting losses will become the non-stressful option.

Do some research into reality vs. expectations as well. Often we feel pain or perceived when life doesn't play out like we thought it would and the disconnect can lead us to feel threatened. If I plan a day out and expect a nice sunny day and it starts heavily raining on the day I'm open to disappointment. However, if I have a plan for all weather types then I might be slightly annoyed but I was emotionally prepared for that outcome some time ago and the disappointment is drastically less so.

Lastly, have a deep think about the concept of actually wanting to get good at losing; why you might want that and how it could ultimately affect your results.

Alternatively, I know it has helped some to reframe losses into "trading expenses", a cost of doing business if you will.

another great post that has me thinking. You're absolutely right about reality v expectation; this is where cognitive dissonance strikes, as I have one image of me as a trader, backed up by some of my results, and this conflicts with what is happening with individual results, and I think this conflict is the cause of some of my negative trading behaviours. In my preparation now I am focusing much more on acceptance of reds as 'investment in my edge'.

Not sure I agree with the gradual exposure line, especially having read the Tendler book it seems that emotional management is more nuanced than that - what I take from your comment here is that you effectively have to just experience it - the only way out is through - but I think with the nature of accumulated emotion and frustration masking and inhibiting learning, this is not the most effective way. It plays a part, sure, but we can definitely be smarter about it. Learning to track all of the signals that occur prior to negative trading behaviours so that the pattern can be established and interpreted in future.

[arbitrage16]

you might have to face a fact that you might not like and cant overcome (not without professional help) your brain may not be wired in the best way for trading, it is not something you have the wiring for, and hence will always struggle with loss aversion.

Possibly, but this doesn't fit with my experience of trading over the last 2 years, which is that it is effectively an exercise in problem-solving. This is a problem that has endured more than the others, hence the post, and I feel that whilst for some people the 'nature' argument that you seem to be proposing may apply, for me I am pretty well balanced and adjusted and as such it will be a process of learning ways to better manage my emotions and accept that mistakes are a positive aspect of trading - as eightbo says truly believing that taking a loss is the best option - in order to move past this issue.

[LeTiss]

Aversion to losses is (I believe) the greatest reason for failure in trading, especially when you start chasing those reds. I was one of those people! I found that if my mindset had been affected by a poor trade, and I was feeling angry, frustrated, disappointed etc............I knew my ability to trade successfully with a clear head would be impacted upon, so I used to just grab my coat and pop out to the coffee shop around the corner for 20 mins. It was a great way of getting air in my lungs and coming back with a fresh mind

[eightbo]

Re: gradual exposure: Theory without implementation is not much use. I also believe everyone has a pain threshold, whether that's a % loss relative to your trading capital, a rough physical amount, time spent in drawdown, whatever. By gradually exposing yourself to anything, a sort of elasticity effect will take place and you can begin to stretch any existing limiting barriers.

[spreadbetting]

Aversion to losses is (I believe) the greatest reason for failure in trading, especially when you start chasing those reds. I was one of those people! I found that if my mindset had been affected by a poor trade, and I was feeling angry, frustrated, disappointed etc............I knew my ability to trade successfully with a clear head would be impacted upon, so I used to just grab my coat and pop out to the coffee shop around the corner for 20 mins. It was a great way of getting air in my lungs and coming back with a fresh mind

Drastic times call for drastic measures, expecting things to change by doing nothing won't ever work and the easiest way to stop yourself chasing etc is doing like LeTiss, and many others of us have done, by simply removing yourself from the opportunity. You'd be surprised how much a simple break can calm you down. It's generally considered to take around 60 days to break a habit or replace it with a new behaviour, in the overall scheme of things that's not too bad.

[Emmson]

Loss aversion is an issue I am struggling with. If I take a red trade, this will impact my mindset for the trades that follow, I will become cautious and hesitant to enter, or if I take a red I will then switch quickly to another runner to try to make it up.

Curious to know how people approach overcoming this issue, or how you have been able to move past it, thanks.

JollyGreen

viewtopic.php?f=2&t=1612&start=10

The inability to take a loss is in all of us, quite simply it is a learned behaviour created throughout the history of man. Let's face it who wants to admit they are wrong? Everyone makes mistakes and most of them will never require us to hold our hand up and say "Oops, that was my mistake..sorry!" Of course we will do that if it helps someone else to feel better because there is a positive side to it; it's called ingratiation. If you remove the third party it becomes much harder to perform because a little voice inside your head says "nobody will know" or "you'll be alright". I call it the "gambling monster" and I am ready to admit it still gets a grip of me on the odd occasion. It's not so much the gambling these days but occasionally I push too hard and simply compound my loss. I never knowingly allow a trade to turn in play anymore - I still get caught by silly errors that I am responsible for.

You need a certain temperament to perform well at trading and most people either lack it or are unwilling to change. It all boils down to fear of failure IMHO. Everyone sees all these wonderful totals achieved by other traders and so a loss makes people feel bad. I make losses, sometimes large ones and I simply cringe when I look at my P&L. I actually find it helpful to talk about them with other traders and poke fun at myself. It removes that stigma and simply shows I am human.

Back to learned behaviour. As a child it is not normal for you to own up - not if you think keeping quiet will save your skin. That's normal behaviour but add in some evidence or testimony from A N Other who says "yep, it was definitely him/her" then suddenly we're in a different situation and we have to own up. This is quite cathartic for most people and they move on in life. Trading can be the same way but in order to move on and progress you have to rid yourself of the demons and for this to happen you have to experience something positive. Andy hit the nail on the head when he said he learned to accept losses. Basically the loss is a brick wall that stops you moving forward and once you accept the loss and move on you will improve. The next loss will be another wall to climb but once you move on it becomes normal. Then you check the P&L and realise the loss was not that significant after all. However if you don't get past that first wall of accepting losses then you cannot experience the positive feeling associated with the insignificance of the losses.

That first wall is the highest and the hardest to climb but if you conquer that one the rest of them get smaller and smaller.

[Black Ladder]

I'm NEW here. Some good replies to a subject I think effects all. For me, if I can get just one win with no losses I'm happy, and I'm off ... Limited exposure.

[ShaunWhite]

The longer you make money and the more money you make, the easier it is to put losses into perspective. That's the falacy about changing your psychology, your psychology doesn't change, what changes is your perception of the loss.

Someone who's £1000 down and loses £100 feels pain and behaves irrationally, but someone who's £1000 up and loses £100 isn't affected by it. The problem therefore isn't the loss per se, it's not winning enough. That's a much more pleasant and doable problem than trying to re-wire your head. The std reason for not winning enough between the losses is not actually having a profitble method in the first place. Anyone can poke a mouse button and make money for a few days, that doesn't mean you have a profitable strategy.

Take automation as an example, that never throws the toys out of the pram and does something stupid. It handles every single loss with all the serenity of the Dalai Lama, but if it isn't underpinned by a solid winning strategy, it will still lose.