During our training sessions with students we are very specific to make them understand you have lost money not because of market but the main reason is Your brain doesn’t like to lose.Its all there in your subconscious mind which is responsible for profit and loss for a trader.
Brain remembers everything.
How you trade in the future is often affected by the outcomes of your previous trades. For example, you may have sold a stock at a 20% gain, only to watch the stock continue to rise after your sale. And you think to yourself, “If only I had waited.” Or perhaps one of your investments fall in value, and you dwell on the time when you could’ve sold it while in the money. These all lead to unpleasant feelings of regret.
Brain is great at coming up with excuses.
Sometimes your investments might go sour. Of course, it’s not your fault, right? Defense mechanisms in the form of excuses are related to overconfidence. Here are some common excuses:
- ‘if-only’: If only that one thing hadn’t happened, then I would’ve been right. Unfortunately, you can’t prove the counter-factual.
- ‘almost right’: But sometimes, being close isn’t good enough.
- ‘it hasn’t happened yet’: Unfortunately, “markets can remain irrational longer than you and I can remain solvent.”
- Operators are making my trade go wrong
- FII’s are manipulating the market.
- The rally is going to fade than I will make a killing
Brain loves loss aversion
Loss aversion, or the reluctance to accept a loss, can be deadly. For example, one of your trading bet may be down 10%. The best decision may be to just book the loss and move on. However, you can’t help but think that the stock might comeback.
This latter thinking is dangerous because it often results in you increasing your position in the money losing investment. This behavior is similar to the gambler who makes a series of larger bets in hopes of breaking even.