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Nial Fuller

NIAL FULLER
Professional Trader, Author & Trading Coach

The Biology of Why You Are Losing Money Forex Trading

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By in Forex Trading Articles by Nial Fuller Last updated on | 22 Comments

Important Note: If you are a young adult or middle-aged male, you need to pay special attention to today’s lesson because it’s going to provide you with some game-changing insight that could significantly improve your trading results.

biology of tradingWe are all familiar with giving back the profits we just made on a winning trade, but why do we do this? What are the underlying causes of why so many traders tend to give back their profits as quickly as they made them, and become stuck in a cycle of ‘treading water’ in the market? More importantly, after you understand the root cause of these problems, how can you make a plan of action to conquer them and finally build a consistently successful trading approach?

What would you say if I told you that there are biological processes at work in your brain which are holding you back from achieving your full potential as a trader? As described in the article Better Trading Through Science, research in a new field called neuroeconomics, a combination of economics and psychology, attempts to explain how people manage risk and why they often make irrational decisions in trading and investing.

Irrationality in trading

You can probably think back to some irrational decisions you made while trading. The problem is that these irrational decisions always seem painfully obvious and stupid in retrospect, but while you’re in the ‘heat of the moment’ when your trade is live, you seem to be possessed and unable to clearly see the full impact of what you are doing.

As mentioned in the article referenced above, “Kahneman and Tversky found that people suffer a higher degree of pain from losing money than they feel pleasure from making money. So they tend to hold on to losing stocks rather than sell and lock in a loss.

Irrationality can also take the form of an emotional attachment to an asset. R.J. Weiss, the 26-year-old founder of the blog Gen Y Wealth, recently posted that he got caught in a behavior trap. When his grandfather passed away, he inherited shares trading at $25. As the shares fell to $20, to $10 and then to $5, Weiss couldn’t bring himself to part with his grandfather’s gift. Finally, in April, he sold at $3.04, locking in a 90 percent loss. “The entire time the stock plummeted, I knew [that holding] was the wrong thing to do. But I couldn’t get myself to sell it,” wrote Weiss.”

In Forex trading, irrational decision making manifests itself when traders do things like jumping right back into the market after a loss to try and “make back” the money they just lost. The pain of losing money often causes people to do the exact opposite of what they should be doing after a losing trade; walking away for a while / not trading.

People get too attached to trades and thus feel too much pain when they lose…this can stem from many sources, such as trading with “scared money” or feeling “desperate” to make your trading work. Whatever the source, our brains appear to be wired to want to over-compensate for losing money in the market, and this clearly is the wrong approach because there’s nothing to ‘compensate for’ because losing trades are part of trading and you cannot avoid losing some of your trades. Understand your trading edge (trading strategy) has a random distribution of winners and losers, this means you should not really ‘expect’ any particular to trade to be a winner or loser, because you never know for sure what outcome will result from any one trade. Arming yourself with this type of logic and awareness will help you to ignore the emotional pain you feel after losing money in the market.

As the article states, people tend to feel less pleasure from making money than they do pain from losing it. This means that you are going to be less likely to refrain from over-trading after hitting a nice winner, because we tend to never be fully satisfied from our winning trades…either we didn’t make as much as we wanted or the market kept going in our favor after we exited. Perhaps if you try appreciating your winning trades more and the profits you made from them, you won’t be as careless with your trading account. After you start profiting each month, it helps to withdrawal some money from your trading account every month and hold the cold, hard, cash in your hands so that you are reminded of just how real it is.

Thus, we are essentially biologically primed to make irrational decisions as we trade the market, as a result, we need a way to counteract this inherent biological trading disadvantage that we seem to be born with, and especially if you are a young to middle-aged man…

How your hormones are hurting your trading

hormones are affecting your tradingThe main point of the article referenced in the beginning of this lesson, is that people tend to have different levels of risk aversion, and young men tend to be the least risk averse and thus they tend to make the most irrational trading decisions in the market. Their high testosterone levels and brain chemistry put them at an inherent disadvantage over women and older men who tend to be more risk averse.

Young men are the man demographic of traders, and they tend to “go wild” due to the higher hormone levels they have. Women and older men tend to make fewer risky decisions in the market, primarily because they don’t have as much testosterone pumping through their veins, or as John Coates put it in the article referenced above: “the molecule that explains irrational exuberance”.

As Coates learned from his study of 250 young men on a trading floor: “As they made winning trades, their testosterone levels rose even higher, leading to profits in the afternoon. The young men began to feel infallible, indulging in increasingly risky behavior, such as buying shares of overvalued stocks. But eventually too much testosterone, too much impaired judgment, would drive markets to unsustainable heights. Then the cycle could end. The overvalued stocks would crash and the testosterone levels would return to normal.”

One of the main reasons we continue to see these huge financial melt downs and hedge fund blow-outs is because these professions are dominated by testosterone-filled younger men who get over-confident the more they win, until eventually their over-confidence leads to lapses in judgment and they take too big of risks…which inevitably causes them to give back all of their winnings and usually a lot more.

Prevention

The implications of the research discussed above, is that us younger men need to swallow our egos a bit and trade more like women and older men and be a little more risk averse and work harder at this most important part of trading. We all know most traders tend to fail over the long-run, and young men are the majority demographic of traders…so it’s no surprise that this demographic of trader tends to have such a high failure rate, considering most have a brain chemistry that is working against them and they either don’t want to drop their arrogance enough to admit that fact and work on it, or they are unaware of it. We need to develop a plan of action to counter-act our own disadvantageous brain chemistry for trading.

  • We must counter-act our hormones (especially if you’re a younger man, which most of my readers are) so that we don’t operate on false-confidence. We counter act these feelings by following a daily trading routine / plan that includes a written reminder of our tendency to become over-confident and by maintaining conscious awareness of this reality. Try to monitor yourself as if you’re an objective party watching yourself trade…try to detach yourself from the emotion and ‘urges’ you might be feeling as you trade, consider them with objectivity and logic, and then let them pass away without acting on them, reward yourself somehow each week you successfully do this.
  • Risk management and sticking to your trading strategy by ONLY trading when a valid setup is present are two great ways to help keep your hormones in check. But you still will be prone to feeling over-confident after a winning trade even if you are doing everything right. It’s best to remove yourself from your trading screens then, build this act into your trading plan and reward yourself each month’s end for sticking to your plan.

It is apparent from the recent research on irrationality in trading, that younger-men tend to be less risk averse than women or older men. Thus, whilst we may have more interest and passion, on average, than most women or older men for trading…we need to work on the other more important aspect of trading, which is managing our emotions and our actions in the market…perhaps much more so than other demographic groups.

The point here is that you have to consciously make an effort to control your feelings which can arise from hormones and other biological processes, because if you don’t, they will get the best of you and cause you to lose money through irrational decision making.

Every trader is unique

It’s obvious that every trader is unique due to our differing biology and brain chemistry. However, certain demographics of people, mainly young adult to middle aged males, tend to be more prone to engaging in overly-risky behavior than others. You don’t want to be too risk averse or not risk averse enough, you want to find a nice balance somewhere in the middle. For some traders this will be harder to achieve than for others, but by using a little commonsense and forward-thinking, it can be done.

Due to the fact that none of us seem to be born with the ‘perfect’ brain chemistry for trading success, it’s apparent that all of us need to work to counter-act these imperfections by planning and being disciplined, but also by not over-complicating our trading strategy. The best way to control our tendencies to become over-confident in the market, trade too frequently and with too much risk, is to boil every aspect of our trading down to its most basic ingredients. Fast-food is bad for you, everyone agrees on this, and it’s mainly because there are too many ingredients in the food that are unnatural or overly-processed. This is a good metaphor to think about trading with, because if you over-complicate your trading by adding too many unnatural ingredients, like indicators, economic news and other “fillers” that you don’t need, it’s going to amplify your inherent human tendency to lose money as you trade. Thus, your biological predisposition to trade ineffectively can be overcome by simplifying your trading approach, being self-aware as you trade, forward-thinking and discipline. To learn more about how to simplify your trading approach so that you can work to offset the biological processes that are stacked against you, checkout my trading course and members community for more information.

About Nial Fuller

is a Professional Trader & Author who is considered ‘The Authority’ on Price Action Trading. He has a monthly readership of 250,000+ traders and has taught 20,000+ students since 2008. In 2016, Nial won the Million Dollar Trader Competition. Checkout Nial's Professional Trading Course here.
  1. Fanani September 17, 2019 at 12:12 pm

    Thank a lot Nial.

    Reply
  2. Dmitriy September 16, 2019 at 1:57 pm

    Thanks a lot, Nial!
    That was a truly beautiful lesson!

    Reply
  3. Sunday September 14, 2019 at 9:53 pm

    what to know more about risk management
    if I want to risk 1$ on a pair what will be my lot size and pip value to set as a Stop loss

    Reply
  4. Zinnur June 2, 2019 at 4:34 am

    Important lesson. Thanks

    Reply
  5. Благодарность October 30, 2018 at 3:47 am

    Magnificent article

    Reply
  6. Rahmat February 26, 2018 at 7:36 pm

    Almost every articles content and language from Nial are really giving positive effects including this one.
    So thank you Nial.

    Reply
  7. Olawa February 18, 2018 at 1:01 am

    Nial is my preferred Forex mentor anyday

    Reply
  8. DERRICK February 16, 2018 at 12:54 am

    all i can say is thank you so much

    Reply
  9. Tha Mathabzo Zulu February 15, 2018 at 8:15 pm

    Thank Nial

    Reply
  10. Duncan February 15, 2018 at 6:29 pm

    Thanks Nial;

    This was a great post which actually helped me rephrase my thoughts after my losses.

    I am still not very profitable at this stage but every time I lose, I look back to see what I could have done better and learn to minimize my losses maybe exit at a small profit rather than a loss!!

    However; after having read this, I also now appreciate the fact that losses are a part of it as well and I feel less discouraged before taking the next trade than before. Things sometimes are easier said than done – true – but after reading these guidelines, I learn a lot and appreciate it heaps. I am learning a lot and the best part of it is that I am enjoying it.

    Thanks for spending the time to post such valuable guidance!

    Duncan

    Reply
  11. Peter Miller February 15, 2018 at 2:46 pm

    Another good lesson. As they say ” life is what you make it “and that goes for trading also, think before you act and know that never one day (or life is ) is the same as the last one, so treat as Nial says each trade as a new beginning. Thanks .

    Reply
  12. rudra February 15, 2018 at 6:24 am

    good one sir

    Reply
  13. Khesiwe February 15, 2018 at 2:14 am

    Excellent article pactice makes perfect I’m going to practice every advice in this article thanks Nial

    Reply
  14. Winston Roy Longbottom February 15, 2018 at 12:01 am

    Thanks Nial, I for one admit that I was influenced by previous success and could not see the next trade through that; I was brought back to reality with some quick losses, however I puuled my thoughts together and looked at my next trade with confidence and considered every possible angle before taking it and I am now back on track. This article has since reassured me of that fact and I must disregard any previous trade before attempting the next. Your articles help keep sanity in the trading game and also leads to further success. Many Thanks. Winston

    Reply
  15. farzad February 14, 2018 at 8:50 pm

    Every word in this article is like gold…

    Thanks AGAIN Nial.

    Reply
  16. Olamide February 14, 2018 at 2:03 am

    Thanks Nial. That’s reminds me of a trade some years ago before I quit trading. I bought EUR/USD on $0.05 lots with $20 risk and i made a profit of $183 on that trade so that winning recency bias got into my head and I felt overconfident, then i went ahead to trade $0.10 lots on my next two trades and I lost both. That’s how I gave back the profit I made from that EUR/USD to the market. Fear start to catch me then I reduce my lots to $0.01 which definitely reduced my profit that I would have make on some trade. Though I just came back to the market since two or three years ago that I quit but am still using demo account to test my trading strategies before trying to come back live. Thanks once more.

    Reply
  17. Wandera Moses February 13, 2018 at 8:50 pm

    Nial thx for this one also. i have improved alot in trading just by reading your articles. thx alot

    Reply
  18. ampurirag February 13, 2018 at 6:09 pm

    Excellent and timely. Thanks Nial.

    Reply
  19. Seiso February 13, 2018 at 1:44 pm

    Typical of Nial’s mail’s. I am not in anyway surprised to find this post hitting the nail on the head as it does and so timely as well. I always find Nial’s post as informing, factual and educating like this one. Thanks to Nial, from now I am no longer going to be enslaved to my last trade’s results.

    Reply
  20. Colin February 13, 2018 at 10:31 am

    Thanks for the trading insight. Particularly about training our brains to behave properly.

    Reply
  21. Hettie van der Vyver February 13, 2018 at 5:12 am

    this makes sense!!

    Reply
  22. Thoko February 13, 2018 at 5:09 am

    Well I am a true novice,I have not started trading yet. If I understand well briefly you say if one is a trader one must bury the past.That is my motto
    So I feel l Iam going to do well.

    Reply
  23. Wasantha February 13, 2018 at 4:45 am

    This article explains what happened when I first started trading forex. After reading many of Nial,s writings on the subject of trading I feel that I am expanded in my knowledge and confident about my trading decisions.I really appreciate Nial,s works,

    Reply
  24. kris February 13, 2018 at 2:59 am

    i noticed today after one loosing trade that it can’t reflect, the other running trades .
    After that i checked my emails and i saw your email as first .I have read it and then it was like you would heard what i sayd before It was simmilar to :

    If you just lost, it has no bearing on the fact that your next trade might be a winner.
    If you just won, it has no bearing on the fact that your next trade might be a loser.

    thank you for your work .
    traders mindset ..

    have a nice day.

    Reply

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