How not to let internalize losses? [Psychology of Trading]

Undoubtedly, every trader knows that loss on the stock exchange is nothing more than an inherent element of this business. They happen in any form of gainful activity that involves risk. As a rule, the entrepreneur knows that the product or service he offers may be defective or not meet 100% of the customer's expectations. Hence, it will generate certain costs related to their activities. And in traditional businesses and trading, what we fear most is what we cannot predict - unexpected loss. On the stock exchange, you need to develop a certain "protective barrier" that will allow us to accept and accept it.

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What is internal loss?

Word Strata usually we identify with such words as error, failure, wrong or wrong. Profit while (it would be difficult otherwise) is associated with positive antonyms of the above phrases, eg equity, victory, good, success and ration. In general, we understand profit or loss as winning or losing or right and a mistake. The negative or positive connotation of both these words will affect how we will treat our loss. Identifying her is associated with subjective feelings. We are driven by emotions, which means that the items in the red instead of being treated as the basic element of trading, start to confirm us that we have made a mistake.

Loss ≠ error

It is hardly surprising that this word has an unpleasant tone. Subjective losses are treated by man as a personal failure that strikes  a sense of their own worth. At this point, we are dealing with its internalization, or internalization. It is only then that it becomes painful.

Making decisions is the process of reaching certain conclusions as a result of analyzing the situation. The decision itself is the choice of one of the possible alternatives (the trader usually relies on probability) in a situation where we do not know all the facts to the end (they are known only in the future). Taking the risk of opening a short or long position, we do not choose between truth and falsehood. Our actions can only be good or bad, and a profitable or lossy transaction. What is the meaning then? According to psychological research (mainly from the book Elisabeth Kubler-Ross), it appears that people tend to identify losing money from making unfair decision. Therefore, they are convinced that they make a mistake and do not take a conscious risk.

What does the loss personalization process look like?

According to the author, I am quoted, there are several basic stages that can be found in the process of internalising loss.

I. Denial

A classic example of denial is finding confirmation from other traders about the rightness of our decision when we have a transaction generating a big "minus" on the bill. We often have a position that brings profit, and when the market begins to lose momentum and turn in the other direction, instead of closing it, we hope to "return to favor". If we do not have the courage to sit down and count how much we lose in a bad transaction, we deny the reality of the current loss.

II. Anger

This stage requires the most modest explanations. Frustration and anger can be directed in any direction. Among the most common phenomena (especially among professional traders) is its unloading on relatives or family.

III. Haggling

You never promised yourself, "I swear, if the market goes back to the level where it was as I wanted to finish it in accordance with the strategy, I would close the position," and then you prayed for closing it to zero? If so, you are simply trying to escape the inevitable.

IV. Depression

A very fashionable and increasingly common problem of modern society. What is manifested? I think that it does not have to be explained too much. Getting away from your loved ones, sadness, feeling unwell, unwillingness to take advice are not all symptoms of depression. They include problems with concentration, inability to make decisions, and lack of energy. If you feel constantly tired and withdrawn from life is the best signal to give yourself some free from the market.

V. Acceptance

This word is synonymous with resignation. A trader who has a loss-making position will ultimately agree to close it down in the red. Very often it happens as a helpful external factor, through which he is forced to make this decision.

Not always the process of internalizing the loss, by analogically keeping it to a large enough size to, for example, clean the bill, looks exactly like in the five above points. Each return in the direction we have set, or the momentary market shake, brings the denial phase several times. In a sense, the stock market is a continuous process (although it is regulated by, for example, opening hours). As a rule, it is difficult to determine how long we will hold the position. In such a process it is not known when the transaction will end. Continuity is one of the factors that significantly affects internalisation. Why? This is due to the fact that we constantly have to make a decision. Uncertainty releases emotions that favor the perception of loss based on personal failures.