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The cycle of grief is a model of how humans experience loss. It is generally considered in context of losing loved ones, but I recently began to apply it to my experiences while holding a losing trade. I found this model allows me to move on from losses much more quickly.
I used the grief.com website to learn about the cycle of grief.
The grief cycle is comprised of 5 stages:
Denial
Anger
Bargaining
Depression
Acceptance
For many years I found myself holding on to losing trades for longer than my trade plan contemplated. I was unknowingly trapped in the 4 stages before acceptance, moving about between denial, anger, bargaining, back to denial, then depression (think capitulation), and then finally acceptance.
Now when I face a losing trade, I can catch the first impulses of denial when a trade doesn't work out. Once I catch that denial, I can then process the loss quickly by progressing myself through the remaining stages of grief with focused intention. My process is comprised of the following steps:
Catch the denial impulse
I express my anger by vocalizing my displeasure of losing.
I bargain by reminding myself that small losses are part of trading and that my method will deliver much larger wins.
I sense the physical negativity of losing; I recall the feeling of losing a game in sports, or monopoly, or anything that evokes negativity, and put it in perspective - this loss is manageable, within my risk limits as per my trading plan.
I move to acceptance - "yes, I lost on that trade, but I have followed my plan. Now that I have accepted the loss, I have fresh capital to fund new trades" and I move on.
For me, applying this model helped me understand why I had such a difficult time accepting a loss. It is well documented in trading books and websites that losses are part of the game, and that one just needs to accept the loss and move on. But what may be overlooked is that for many people there are 4 steps that must be processed emotionally before acceptance can be contemplated by the mind.
I would be interested to learn if anyone else finds this model helpful. Please post if you have any thoughts or feedback.
An automated strategy lets me bypass stages 1 (not exiting a looser) and stage 2 (exiting to soon – missing profit).
What can be done to mitigate stages 3, 4, and 5?
1. Denial (This trade will turn around. I fail to exit a loosing trade.)
2. Anger (Why am I trading instead of working, Boo Hoo, I’m won’t ever do this again. I exit to soon and miss the profit.)
3. Bargaining (My strategy needs work, If I work on it another 50 hours I won’t loose again. Setting myself up for unmet expectations.)
4. Depression (50 hours later, I just give up as I can’t find a strategy improvement)
5. Acceptance (Convince myself, again, that every profitable strategy takes some losses)
In a swing ttrade the grief can go on for days! For me, it starts during the trade and lasts until the next trade. I’m not sure if I can ever remove my emotions from trading.
and I believe that there my be some psychological allegory...that is to say a connection between how participants process grief as in a trading loss.
Interesting because I can identify with the 5 point description and make specific connections that may be related to my development as a trader. BUT, I learned to love my little losers early. Kill the loser small and learn how it snuck in to your deck or it will be someone else's deck really fast.
The process gets simplified to step 2, followed immediately by step 5.
Trading: The one I'm creating in the present....Index Futures mini/micro, ZF
Posts: 2,311 since Nov 2011
Thanks Given: 7,341
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I think it’s great you are working on this psychological trading “stuff”.
What you are doing is working toward the development of your trading probabilistic mindset.
Once this goal is reached the realization dawns that the sequence of trades, produced by the sufficient edge, that work or not can never be known. That market analysis is an all encompassing, slippery, persistent and eternal illusion sucking in 95% of traders into her powerful and mighty clutches. That unwavering pristine trade execution time and again.... mundanity an understatement... is the great calling from the summit of the mountain of cash awaiting the faithful trader of the probabilistic stratosphere.
The "lose small win big" style I am trading now -- small, delta neutral pairs, automated close orders -- I don't even pay much attention to losses. I just let em go. The amount of psychological damage is much less.
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
