When Traders Lose Confidence - Part One: Gaining Perspective

One of the questions I first ask traders who are going through a drawdown is "Were you wrong, or were you trading poorly?" It's a key question. There will always be risk and uncertainty in markets. Even the best traders I've worked with at the top firms go through strings of losing trades and losing periods of time. A losing trade is not necessarily a bad trade. Sometimes the odds can be with us and we can lose the bet. Sometimes we're just wrong.

That is different from trading poorly. Trading poorly means that our process was incorrect, not just our idea. We sized the position too large; we ignored our stops; we overtraded a slow market.

The key, whether we're wrong or trading poorly, is to gain perspective by transforming downturns into opportunities. If you've been wrong, you may have an opportunity to reassess the market and revise your ideas. Many times wrong trades lead me to realize that the market is stronger or weaker than I realized, and that sets up some very good trades.

If you've been trading poorly, you have an opportunity to revisit periods in which you've traded well so that you can get back to basics and work on becoming more consistent with your strengths. This is where trading journals can be invaluable: they keep you in touch with what you do well and help you build on those strengths. It is at those drawdown times that you most need to be reminded of your strengths, so that you can return to those and draw confidence from them.

In the end, confidence comes from developing as a trader, not from being right all the time. Confidence is knowing that you'll lose, but also knowing that you can recover those losses. At the end of each trading day, I used to ask rookie traders to write down the one thing they did well that they wanted to continue and the one thing they did wrong that they would work to correct the next day. Imagine the cumulative impact of intently addressing just these two questions every day for a full year! The net result is a building of confidence, a deep knowing that you can expand your strengths and correct your shortcomings.

Confidence comes from mastery--and especially self-mastery. That is why I love trading: it's an intensive vehicle for self-mastery.