Firstly your success rate may vary depending on the different types of set ups that we have, different types of year, different market cycles and secondly I’m perhaps even more importantly is that we are not robots. What do you think is going to happen to a trader whose account is down 50% and they know that they now need to double the account just to get back to break even. They are going to start taking big risks they’ll be increasing the position sizes, forcing trades and also increase the number of trades that they open, revenge trading, holding trades for too long hoping for more profit and getting greedy. Unwilling to close at a loss when the time is right to do so so another words what are they basically ending up doing is gambling and let me tell you in my experience for saying what happened to many different traders it has to happen a hell of a lot sooner than a 50% draw down.
Different threshold but it really doesn’t take much for a lot of stress and pressure builds up and take big risks and just loosing. But you know it’s not just about the drawdowns from a losing streak either it’s also about how we act with individual losing traits even before we close them as a loss. Studies have found that we value losses about 2.3 times higher than gains of the same value. We also found that number was probably closer to five times so we value losses at five times higher value. Read that again if it helps! So the bigger and more meaningful that loss is, so when we risk lower position sizes we’re still going to encounter lots of versions but it’s just going to be relatively less powerful than if it’s a bigger amount. Lots of emotion gets heightened when the lot is bigger, we start taking risks to avoid taking a loss, we go to irrational things like doubling up positions to get a better average entry price hoping that the price will return in our direction.
But by taking these sort of actions it means that once we do eventually take a loss and not being much bigger than we first anticipated, rather than risking less than 2% we don’t just risk the amount more than that that we originally planned we actually end up risking exponentially more because of our own psychological flaws and this leads this loss extending and getting bigger and bigger. Now no one likes to accept that they have any weaknesses so you might be thinking that you can probably overpromise things just by strengthening your mind and improving your self discipline but actually it goes a bit deeper than just being able to do just that. There are plenty of ways that trading affects our brain and our bodies when it comes to the brain. Neuroscientist discovering more and more about it every year there’s so much they’ve already found out but actually there’s still so much that’s relatively unknown to how our minds work.
Talk about it for hours but for now I just want to read you something from the neuroscientist and former Goldman Sachs trader John Coast so he says when we take on the risk including financial risk we don’t just think about it we also prepare for it physically body and the brain fuse as a single functioning unit. So he talks about when traders go on a winning streak and had the biological response known as the winner effect, when males and competition testosterone level search increasing the hemoglobin and hence the blood capacity to carry oxygen in the brain increasing their confidence and appetite for risk the winner emerges with even higher levels of testosterone leading to a positive feedback loop. Now thats really interesting. Hence we say, trading is 90% mindset and 10% skill. This is also the number one reason why traders choose to go with an instant funded account, it’s because this element of the funds not being yours play a vital role when trading.