We have all heard of the famous experiment by the Russian physiologist Ivan Pavlov where dogs have been conditioned to expect food following a particular event. The Pavlov dogs have experienced the same sequence of events so often, at some point they know what's coming next without really thinking about it. They start to show emotions 'in advance', and salivate even before their food is served. This is one form of conditioning.
Another form of conditioning is by an event accompanied with (very) strong emotions. This does not necessarily need to be repeated more than once. Because of the extremely strong, possibly traumatic, emotions, the condition is created instantly. But unlike the first form of conditioning, this one is 'less exact'.
After this second type of conditioning, the same strong emotion can be reactivated by many different events, images, sounds, smell, taste or other senses that may seem irrelevant at first. The person experiencing this will be surprised as he doesn't really know how the current situation is related to the emotional situation in which the conditioning took place. But at closer inspection it may very well turn out that many different small minor details in the conditioning event have settled in the brain waiting to get triggered and fire the strong emotions again.
The reaction to the triggering event is the same in both types, the conditioned person will react without having to think about it. But if the person doesn't know what exactly the triggering event was (type 2), this may be very confusing. In the end this may change a person's behavior, character etc.
In trading, a huge loss or a huge gain may both be a traumatic emotional experience. In this case, a traumatic experience is not traumatic in the 'traditional' sense, but more like a strong emotional experience that is not processed by the brain in a conscious way. All events leading into this experience are unconsciously stored in our brain. Later on, any of these little triggers may fire the same original strong emotion again without the trader really understanding where this emotion is coming from or what triggered it. A trader may start to change his (trading) behavior in order to avoid the reactivation of the strong traumatic emotions (or in case of huge euphoria try to reactivate it). This behavioral change may very well have a negative effect on his trading account.
For instance a small losing position or a position that goes wrong just after it was taken, may cause disproportional emotions by reactivating the strong emotions of the huge loss made in the past. Then, as if the trader is driven by a sort of instinct, he reacts to this emotion and decides to close the position sooner than planned by the analysis made before the trade was taken. It is getting more and more difficult to follow a trading plan.
How should a trader avoid building up these traumatic experiences that led to the conditioning? By trading less and by trading smaller. A small loss or a small gain relative to account size at less frequent intervals does not cause any traumatic conditioning. The loss or gain is processed in a conscious way leaving no 'hidden landmines' in the brain. Over time, a trader may increase trading size and maybe risk gradually, but only after proven positive trading results. Let the brain get used to the new situation before moving on. Brett Steenbarger has a nice analogy about this: a good joke is very funny (strong emotion) the first time you hear it, but it is getting less and less funny each time it is repeated (conscious processing).
How should a trader unlearn the conditions once they have settled? This is even more difficult than preventing the conditioning. And there is no short answer, just a few suggestions. Trading less may still be a good start. Stop trading for at least a day after closing a position, no matter what the outcome was. In the mean time, stay away from the trading screen and let the emotion of a loss or gain fade away during the non-trading day(s). Also make note of every little detail that influences the process of decision making. Keep a detailed journal of all triggers of emotions and try to identify the root cause. This is all very difficult and this answer is by no means complete.
So to sum it up, start trading small and slow. Keep a trading journal and only gradually increase trading size if trading results are positive. Never increase trading size to make up for a loss. And although this 'compensating-trading' may work once in a while, it will absolutely contribute to traumatic experiences causing bigger losses in the end.
Do you really need to trade? : Destructive trading