Dr. Elder is a professional trader and a world-class expert in technical analysis, but he’s also a practicing psychiatrist. He believes that everyone can become a better trader by developing discipline and learning to avoid the traps of emotional trading. Like many psychiatrists, he had patients with alcohol problems and discovered that although medications and clinics can help in the short term, many alcoholics relapse. He sent his patients to Alcoholics Anonymous meetings to help them recover but it wasn’t until he attended a meeting himself that he realized something…
Alcoholics Anonymous meetings seem to be talking about trading stocks if you substitute the word “alcohol” for “losses”.
A gambler cannot resist the urge to bet. An amateur trader cannot resist being in the market. An alcoholic cannot resist having alcohol. As an investor, you should learn to handle your losses the way AA handles alcoholism.
Sobriety begins and ends in your own mind. The markets do not feel your emotions. They exist only in you.
Alcoholics nurse the fantasy that they can control their drinking when it is really destroying their lives. “My wife won’t divorce me after I get a handle on my drinking…” There is a parallel between an alcoholic and a trader who is being ruined by losses. “He keeps changing trading tactics, acting like an alcoholic who tries to solve his problem by switching from hard liquor to beer. A loser denies that he has lost control over his course in the market.”
Eventually an alcoholic will hit rock bottom – being rejected by a family member, losing a job or having major health issues. The pain of rock bottom will penetrate an alcoholic’s denial. He will see how deeply he has sunk. Dr. Elder says the following:
Successful traders are akin to social drinkers. Social drinkers can have a little and stop. Traders can take a few losses in a row and stop to rethink their methods. Losers cannot stop because they’re addicted and hoping for a big payoff. Losers keep making low-probability, high-risk trades and get wiped out.
“An alcoholic needs to admit that he cannot control his drinking. A trader needs to admit that he cannot control his losses. He needs to admit that he has a psychological problem with the losses and that he is destroying his trading account.”
The key is not to make emotional, risky investments. Risk is fine – excessive risk isn’t. You should approach it like a business. Storeowners take a risk whenever they order merchandise. A crate full of stuff may be just enough to profit and a tractor trailer load may be way too much. Investors should have a calculated risk where they can lose a few in a row and still be okay. Not going all out, and not making excessive investments that can wipe out the entire portfolio.
Those in AA will say, “I am an alcoholic, I am powerless over alcohol.” If you’re in the stock market, you should say, “I am a loser, I am powerless over losses.”