I believe we are more alike than different. When confronted with unexpected adversity, we likely to be gripped by a mix of emotions: panic, hopelessness, or a dogged determination to get even. The consequences of each of these reactions are discussed below.
Trading More Frequently
First, our trading horizon may shrink drastically as reaction to the losses i.e., if were a position trader trading off daily price charts, we may now convince ourself that the daily charts are not responsive enough to market fluctuations. Accordingly, we might step down to the intraday charts. Similar scenario with intraday trader i.e., going from say 15 min chart to 5min or 1 min chart. In so doing, we hope that we can react more quickly to market turns, increasing our probability of success.
Trading More Extensively
Another way we react and sabotage our trading is by looking for instant gratification i.e., we may also decide to trade a greater number of commodities in order to recoup our earlier losses. The misguided idea here is, if we trade more extensively, the number of profitable trades will increase, enabling us to recoup losses faster.
Selective Acceptance of System Signals
Another way we might react to losses is we might decide to stay on but trade hesitantly, perhaps second-guessing the trading system or being selective in accepting the signals it generates. This could be potentially disastrous, as we might go head with losing trades, ignoring the profitable ones!
Taking Riskier Positions
Another way we migh sabotage our trading is by deciding to trade the most volatile commodities, hoping to score big profits in a hurry, rationalizing that there is, after all, a positive correlation between risk and reward: the higher the risk, the higher the expected reward. For example, a trader who has shunned the highly volatile Standard & Poor’s 500 Index futures might be tempted to jump into that market to recoup earlier losses in a hurry.
Paralysis
Another way we react is, instead of trading more fervently or assuming positions in more volatile commodities, we might swing to the other extreme of not trading at all. Although a string of losses hurts our finances, the associated loss of confidence is much harder to restore. A trader who has suffered serious losses will start doubting himself and his approach to trading. Very soon, we may decide to close account and salvage the balance.
System Switching
Worst of all we might decide to forsake a system and experiment with alternative systems, hoping eventually to find the “Perfect System”. Through anxiety, we forget that no system is perfect under all market conditions. Lack of discipline and second-guessing of signals are the likely consequences of system switching.
"Our real blessings often appear to us in the shape of pains, losses and disappointments; but let us have patience and we soon shall see them in their proper figures." ~ Joseph Addison
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