To err is human; to continue to err is the greatest mistake traders make.
Any individual trade can make money or lose money. If you're in a drawdown mode over time, however, at least one of the following problems is present:
1) You're Off Your Game - Not trading well, taking bad trades, failing to take good ones, not managing money and risk well.
2) You're Wrong - You're trading well (i.e., following rules and good trading practices), but you've just misread the market.
Either way, you need to recalibrate. First you need to answer the question, "Is it me, or is it the market?" Then you need to figure out how to get back on your game or you need to reassess the markets and find opportunity.
To recalibrate, it is necessary to step back from trading. The greatest mistake traders make is not making mistakes--we're all fallible, and we're all going to lose money at various points in time. No, the greatest mistake is to *continue* making mistakes.
When we don't step back from trading and recalibrate, we take the magic of compounding and turn it against ourselves.
Some of the best active traders I know routinely take a midday break and review their morning trading. They generate charts of their day's P/L, review markets, and basically start their day fresh whether they're up money or down. Very often they'll use that break to set a goal for the afternoon that corrects any problem they noticed in the morning.
(BTW, check out the clever post from Trembling Hand Trader, who generates charts of his own trading performance and then applies technical analysis to those. Just seeing if your recent trading is in an uptrend, downtrend, or range and examining the volatility of your returns will tell you a lot about how you're doing and help you begin the recalibration).
The same idea applies to trading at the end of a day. Reviewing how markets behaved and how you performed--along the lines of the performance idea I linked yesterday--provides you with a sense of how well you're understanding markets and how well you're capitalizing on that understanding.
Professional football and basketball teams know that they need to take a time out when the game isn't going their way. It's a chance to regroup, alter strategy, correct mistakes, and just catch a breath. Similarly, we take the first step toward changing performance by interrupting our performing and entering into a reflective mode.
We set the stage for some of our best trading once we've stopped trading. It's not enough to think about markets. We also have to think about our thinking.
Coaching Yourself for Success