Pipsqueaks #15 – Part 1: Tough Guy Trading

“Probably the most significant and pervasive characteristic of the human pleasure machine is that people are more sensitive to negative than positive stimuli”  -Amos Tversky


Earlier today I was able to partake of one of my favorite guilty pleasures: Carvel ice cream. It’s a wonderful thing to enjoy especially if you happen to live in the desert. Mind you, life in the Sonoran Desert in Arizona isn’t that bad, when you take into consideration that homes are air-conditioned and ice cream is plentiful. But think for a moment – what happens, say, for instance if you take the electricity away? Power interruptions where I live are very rare, but they do happen. And when they happen, the initial reaction, especially in summertime, is panic! No ice cream and no air-conditioning for sure!

Of course, electricity and all the nice things that come with it we tend to take for granted, but losing it makes you twice as miserable as having it makes you happy. To say it another way, people are by nature “loss averse”. As Forex traders we can all relate to loss aversion. A while ago I came across a presentation that referenced a university study on the subject; I don’t have the specifics of the experiment to reference, but I will share with you a few notes I took:


Half the students in a class are given coffee mugs with the insignia of the university embossed on them. The students who did not receive mugs are asked to examine their neighbor’s mug. Mug owners are invited to sell their mugs and non-owners are invited to buy them. They did so by answering a question: in each the following prices, indicate whether you would be willing to give up your mug/buy a mug. The result was…those with mugs demanded twice as much to give up their mugs as others are willing to pay to get one. So the attitude of the students is – once I have a mug I don’t want to give it up. But if I don’t have a mug, I don’t feel an urgent need to buy one. The experiment had been performed numerous times and the results are always the same.

Tough Guy Trading Forex


So in other words, when people have to give something up, they hurt more than they are pleased to acquire the same thing. Which goes a long way in explaining why we dislike/struggle/agonize over dealing with our trading losses. In trading loss aversion causes traders to hold losing trades and not give them up hoping they return to profit. If they didn’t have the trade and looked at it objectively they probably wouldn’t want the position.


Which leads me to the gist of this week’s article: many of us are familiar with the idea that 95% of Forex traders succumb to failure and abandon trading. Okay, I know this is not news for many of us, but the point I wanted to make is this: as far as having the mindset of professional trader, most of us are, like Carvel ice cream, too soft. We are ill prepared and lack the emotional fortitude to deal with the stresses and emotions which are part of currency trading. Let’s face it – this can be pretty tough business. How discouraging is it when you open a trade and immediately it turns against you? It’s the pits. But here’s the rub – we just need to get over it! It’s not exactly my intention to sound harsh, but trading is a very grown-up business and there is little room and even less patience for whiny babies. When I was just getting started, I remember my first day in a trading chat room.


One of the members was not conversant with the notion of drawdown; even I as newbie was aware of this and I was still just in demo only mode. Anyway, one of the group leaders called a trade, and the price action quickly reversed 20 pips or so. One member started moaning and complaining something fierce, much to the ire of the guy who called the trade. Crying about how he lost so much money, blah, blah, blah. Eventually the guy was kicked out of the group and rightfully so. As a new trader I was impressed with the people running the group took this seriously enough that the integrity of the group was placed ahead of pandering to a problematic client. Currency trading is very much a grown-up business.

Ever notice when you read books or web posts in such regarding trading strategies, techniques and such, that the author will give you a certain level of information, but will almost never hold your hand and spoon-feed you just everything you need? There are certain things that you are expected to know, and if you don’t know you’re expected to figure them out on your own to some extent. Just part of being a grown-up in this business.


Stay tuned for part two, where I’ll discuss some more ideas regarding loss aversion and remaining tough through hard times. See you then.


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