Why We Can’t Always Learn from Our Losses

The late and great American learning psychologists have given us great insights into how people learn and how they forget. Perhaps the greatest contribution that psychologists like behaviorist B. F. Skinner made was to show us that most of our emotional responses are not innate but rather learned. As traders, we can learn a great deal about the learning process by studying what these eminent psychologists have discovered. The lessons learned to apply to all traders and all systems. Whether you are trading seasonals, cycles, fundamentals, or mechanical systems it is imperative that you learn from every loss you take. Losses are the tuition you pay for your education in the markets.

L. Thorndike was the “father” of American learning psychology. He was among the first to suggest that we learn emotional responses. He also noted that there are literally thousands of “wrong” behaviors we can learn and only a relatively few “right” behaviors.

How can we “unlearn” nonproductive or bad behaviors and replace them with productive, good behaviors? How can a trader overcome losing ways and replace them with winning ways? Can reward and punishment be used as motivators? Why? Do not we learn much from our trading losses? These are some of the important issues that learning psychologists can answer for us.

Thorndike pointed out that although parents and educators have used punishment for many years, it is only effective in specific circumstances and is virtually ineffective in teaching new behaviors when used alone. If I punish you every time you do a particular thing I do not like, you will stop doing that thing. However, you may still do many other things that I do not like.

I can punish you for each and every behavior I wish you to eliminate but my battle may be a life-long one akin to picking dandelions from my lawn without removing the roots. While some new behaviors may be taught with punishment, the use of rewards for appropriate behaviors gets faster, better, and longer-lasting results.

There are many ways to lose money in the markets, but there are only a few ways to make money. And there are even fewer ways to keep the money. While traders collectively spend millions of dollars every year attending seminars, buying books, tapes, and trading systems, they focus very little energy on learning the behaviors that will facilitate success. Why? Because the rules of trading systems, methods and indicators are very specific, often objective, and frequently require nothing more than rote memorization. In other words, they are easy to learn and easy to apply.

If you trade without a plan, your chances of success are slim to none. Yes, you may be one of the lucky few who hit it big the first time, but the odds are minimal. Without a plan, you will find yourself buffeted about by the winds of chance, the opinions of others, the persuasion of newsletters and advisors, the pressures of fast-talking brokers and the bias of the media. Your responses will be whimsical. But the greatest danger is that you will not learn anything from your behavior.

This could mean that you are following a computerized trading system from a chart book, a newsletter, astrology, or a random number generator. Regardless of where the input comes from, it must be treated as relatively close as possible and as often as possible. What I recommend is that you employ a relatively mechanical trade entry system and a more flexible exit system. In other words, I advise against rigidity, against inflexibility in following any plan. But to stray from a play, you must have a plan at the outset.

Last word

There are various levels of adherence to a plan. Every trader must find his or her level of comfort in straying from the beaten path. Some traders feel uncomfortable with just a minor deviation from the course and others are able to tolerate wide variances in their plans. The final determinant must be your results in the marketplace.

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