Near misses are inherent in trading.  No trades, even the best ones, are perfect.  There is always a better entry, a better placed stop loss, a better stock or a better exit.  There is always room for improvement.  The challenge for traders is to take that feedback the market provides and use it improve your trading regimen.

Jonah Lehrer at The Frontal Cortex has a post up explaining the ‘near miss effect.’  Research shows that near misses provide rewards to our brain not much different from actual successes.  Lehrer writes:

According to the scientists, this suggests that near-misses have some intrinsic appeal for our reward circuity, tricking those brain cells into believing that we won even though we actually lost…This suggests that, from the perspective of our dopamine neurons, near misses are virtually indistinguishable from actual wins.

He goes on to note how casinos take advantage of this proclivity.  They design games that generate near misses thereby making players feel like they have won when in fact they have just lost.  Lehrer notes there is a likely explanation for this reward circuitry.  He writes:

The purpose of near misses, then, is to keep us motivated while we slowly improve our form.

One can see that for games of chance a near miss is not something one can necessarily improve upon.  In the financial markets near misses are found in abundance.  The challenge is that time is a fleeting commodity the markets.  A trader’s capital can run out before they have the chance to “improve their form” to become competent and profitable.  There is no shortage of traders who have had to come back to the markets after initially having crapped out.

There is a potential downside to this effect as well.  Some traders are unwilling to assume responsibility for their trades.  These traders may use the near misses the markets provide as an excuse.  You see this constantly where traders blame high frequency trading, the Fed or other unseen forces for their trading mistakes.  They forfeit this tuition in an attempt to protect their own self-image.

The market has a nasty way of stringing traders along.  Consistent profitability can seem like it is just around the corner.  Therefore measuring your trading performance is a crucial tool in establishing the progress one is making (or not) in the market.  For those unable to harness their trading in time there is always the option of simply quitting.  Don’t worry about the market in that case.  It will still be there if and when you want to take another whack at it.

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