Have you ever noticed that after a solid winning trade you often lose money on the next one? Well, it may be something you can prevent, at least sometimes. You see, after a winner, there is emotion that can cause traders to want to jump back into the market without a signal being present.

False-confidence and even addiction to the euphoria and the ‘high’ you get from winning are things that can end your trading career just as it’s starting to take off. After winners, we may literally invent or see patterns on the charts that are not even there; we convince ourselves into jumping back in the market, subconsciously.

Before we proceed, let me be clear, you cannot avoid all losing trades, sometimes they are just normal statistical occurrences of your trading edge. What we are talking about here are the losers that you can prevent; the ones born of emotion, fueled by brain chemistry that you are probably unaware of and that you need a planned-out course of action to deal with…

Why we tend to lose after winning

Right after a winning trade is indeed the most dangerous time to trade. Whilst that may seem surprising to some of you, it has a scientific basis that we need to understand…

After a winning trade, we feel good, there is no denying that and you cannot stop it, and why would you want to, right? However, this euphoric feeling can lead to disaster of you are not aware of it and how to deal with how it makes you feel. Dopamine is the feel-good chemical released in your brain (learn about dopamine here) when something happens that makes you happy, like a winning trade. The danger comes in the form of addiction. You can become addicted to the feeling you get from dopamine.

For a trader, this means after a winner we are more likely to over-trade and do something stupid with our trading platform because our brains are subconsciously looking to keep the dopamine high going. When riding a dopamine high after a winning trade, our brains naturally perceive less risk in the market and that can cause us to deviate from our trading strategy.

Our brains will do anything to keep feeling that happy feeling from fading. Ironically, as with any other form of addiction, like drugs, gambling, etc., dopamine gets released whether or not what you’re doing is good for you or your body. The very act of entering a trade, an event that previously made you money and made you happy, will release more dopamine in your brain, thus keeping the ‘high’ going. I hope you can see how dangerous this is and how it can cause losing streaks that lead to account blow-outs.

So, the brain will get what it wants, whether you win or lose, and as traders, we need to be aware of this genetic ‘flaw’. Dopamine is truly a double-edged sword that can either reinforce good habits or reinforce bad habits. It is up to you to understand this and make sure you are only reinforcing the good ones. You must understand your own mind and control it so that it does not control you in negative ways.

Solutions

So, now that you know why it’s so easy to lose money shortly after winning, it’s time to figure out how you will avoid this major pitfall in the future. The trick is to have some type of filter in place to catch yourself from making an emotion-fueled / dopamine-fueled trade. Whilst it may sound cliché to once again talk about trading plans, their importance in this matter cannot be over-stated.

The solution to this mistake is to ensure you’re only subjecting yourself to your edge, which needs to be a well-defined trading edge (for example price action trading is my edge). You need to build and follow a trading plan so that you are not simply entering on random whims of confidence or because you think a chart is about to do something. In essence, we just need to understand our brain chemistry and learn that by filtering and following our plan we can hopefully be in a scenario where these releases of feel-good chemicals, like dopamine, are not causing us to become addicted to the feeling of simply being in a trade.

Summary of solutions to battle the tendency to over-trade after winners:

  • You have an actual trading strategy / trading edge that you fully understand and can define.
  • You have a trading plan built around the above strategy.
  • Make sure you only subject yourself to your edge, which should be well-defined and in your plan.
  • Your trading plan should act as a ‘filter’ of sorts – something you always run any trade through so that you can separate those trades that are dopamine-fueled ‘mistakes’ from the ones that are legitimate occurrences of your edge.

Conclusion

The best way to avoid giving back trading profits is by making sure you have no doubt about what you’re looking for as you scan the charts each day. When you reach a point of having mastered your trading strategy, you only need to build a trading plan around it and stick to it, to filter out the emotion-based trades that traders often make.

You can get started learning my trading edge and how I trade the market, as well as how to build a trading plan around that edge, in my price action forex trading course. As they say, a journey of 1,000 miles starts with a single step, and if you want to stop losing money unnecessarily in the market, it’s time to take the first step on the right path.

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