Janice Dorn, MD, PhD
Neuropsychological Trading Coach
Janice Dorn, M.D., Ph.D., has been a full-time futures trader since 1994. Doctor Janice holds an M.D. in psychiatry and is board-certified by the American Board of Psychiatry and Neurology in general psychiatry and addiction psychiatry. She holds a Ph.D. in brain anatomy. A graduate of Coach University, she is a pioneer market psychiatrist and financial neurobehaviorist. Doctor Janice has written over 500 articles on the financial markets and coached over 600 traders worldwide. She is the Global Risk Strategist for Ingenieux Wealth Management Group, Sydney, Australia.
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Security is mostly a superstition. It does not exist in nature, nor do the children of men as a whole experience it. Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure or nothing…Helen Keller
Years of trading and educating hundreds of traders have taught me that the single most important synaptic strategy in trading is the ability to cut losses. This must be done in a ruthless, relentless and unemotional manner. If you do not program this into your trading strategy and etch it into your brain game, you are at risk for ruin. These words must never leave your mind if you want to be successful as a trader: Unless I cut losses and stay with my strategy, I am at risk of ruin.
How you determine when to cut losses is highly individual. Everyone has his or her own pain threshold. Your job as a successful trader is to know yours. But knowing what to do and doing it are two separate issues, and knowledge without action is worth very little. To avoid the risk of ruin, you must be prepared at any instant to act on your knowledge—and to act quickly.
What you do and say to yourself in these situations is critical. First of all, you must recognize that the trade is not working and get out of it. It makes no difference whatsoever what happened or how it happened. What matters is that you act quickly. Why? Because as long as you continue to hold a losing position, you will incur more losses until you are forced to get out either by your own internal pain threshold or by a margin call. When the latter happens, you allow someone else to take charge of your account (the broker, the exchange, the clerk at the margin desk) and tell you to liquidate the position. In other words, you lose control.
Just try to imagine how that feels and what you would be thinking at that time. The loss of your ability to execute is the loss of your liquidity. You have no money, and someone else is telling you what to do with money you don’t have but have to come up with in order to meet your margin call. The opportunity you were seeking when you began to trade has turned into a kind of prison where someone else is now calling the shots about your money. In essence, you have lost your freedom.
Remember what we talked about in the www.trending123.com live trading room on Wednesday? When you put money into the markets, you are doing nothing more than buying and selling risk. The rules you make for your trading are yours. It is your money and your choice. When you break your rules, for whatever reason, you are out of control. What started as a loss was either denied or rationalized by some sort of stinking-thinking process that turned a trade into an investment, then into a margin call.
This sets up more rationalizing, denial and blame. You look everywhere but at the source of the problem—i.e., your inability to take personal responsibility for your own trading. What started out as a trading issue now becomes an issue of personality. Losing money—and feeling desperate and despondent, like a failure—leads to a panoply of other feelings about yourself as a trader. Underneath are anxiety, fear, and confusion, but they come to the surface and manifest as anger. In order not to feel the pain of these feelings, you direct them outwardly to anyone or anything. In other words, because you were unable to execute your synaptic strategy, you lost control of your liquidity, which put you into a point of helplessness and despair that was intolerable to bear so you lashed out at someone else.
This is the blame game, and it happens day after day, both in and out of the markets. The issue here is that you broke your own rules and sent yourself into a downward spiral. In life outside the markets, rules are set by society. If something goes wrong, there is no shortage of people, places or things to blame. In the markets, you set your own rules. If something goes wrong, who is to blame? You will never succeed as a trader if you are unable to get up, walk to the mirror, look in the mirror and say “I made a mistake. I did it. I did not execute my strategy. It is my fault.”
This is the first lesson about risk. In coming Trading Wisdoms, I will be delving deeper into risk and what you can do to help yourself come to grips with the "risk of ruin." For today, it is critical to understand that the inability to cut losses is not, at its core, a trading problem. It is something in the personality of the trader that does not want to admit a mistake and sends him or her into an endless search for every possible reason to stay in a trade when it is clearly not working. It is something in the hardwired mechanisms of the trading brain that has not been trained to execute without hesitation.
Please use this as a starting point to begin to understand the nature of risk. From this day on, write down every trade you make, why you made it, and what you felt and thought at the time you did it. Use yourself as your own risk laboratory subject. Remember that we are all human, and we all make mistakes. The challenge of successful trading is to recognize and acknowledge a mistake as a mistake and to train your synaptic strategies so that you will not make the same mistake over and over again, expecting different results.
I am always doing that which I cannot do, in order that I may learn how to do it…Pablo Picasso
Until Next Time,
Good Trading and Brain On!
Janice Dorn, M.D., Ph.D.
janice@thetradingdoctor.com
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