Wednesday, October 15, 2008

Thoughts About Breaking Trading Slumps

It's never easy going through a trading slump, but it's especially frustrating and difficult when markets are moving and you're missing out on so much seeming opportunity. I've received quite a few calls and emails from traders in slumps lately, and frustration is the common emotion: frustration that is channeled as self-blame. It's not just that the traders are losing money; they also hold themselves responsible for their losses--and they can't let it go.

Generally, what initiates a trading slump is not what sustains it. The initial cause is often a misreading of markets, an outsize losing trade, or a careless trading error. Those are things that happen to any trader who participates in markets long enough. Rarely, in and of themselves, do these initial mistakes and losses ruin overall profitability.

What does ruin profitability is compounding these unfortunate but expectable errors with subsequent bad trading. By "bad trading", I don't just mean trades that lose money. Rather, I'm referring to trading decisions that one would not have taken had those initial losses not occurred. The bad trading could entail ignoring an obvious signal to buy or sell. It could result in buying and selling in the absence of signals. It could result in a shift in position sizing or a large change in how manages the risk associated with each trade.

This transition from normal, expectable initial mistakes and losses to subsequent bad trading is what turns loss into slump: it is what sustains a slump. The trader cannot accept the initial loss or mistake, learn from it, and put it behind them. They cannot simply deal with it as one of those normal, expectable frustrations, like getting caught in traffic or like choosing the wrong restaurant. Instead, the initial losses and mistakes are personalized. They become threats, not so much to P/L, but to self-esteem. Suddenly, the trader convinces himself or herself that this is not acceptable: I must get my money back or I must stop trading altogether, because I have performed so poorly.

Can you imagine a professional athlete--say, a football quarterback--who throws an interception and then becomes so self-blaming or so fearful of repeating the error that he abandons the game plan that he rehearsed with coaches and players? That is the trader who turns mistakes into slumps.

Of course, once the initial error is compounded, now the motivation for self blame is doubled: the slump becomes self-reinforcing. The more money is lost and the more the trader makes bad decisions, the more he or she alters those "game plans".

The answer to this problem is to embrace your fallibility. You *will* throw interceptions at times. On occasion, you'll lose, and, on occasion, you'll make mistakes that cost you victory. That happens to professional athletes, chess players, performing artists trying out for positions, and business leaders. What makes you a professional is not perfection--making no mistakes, taking no losses--but the ability to accept setbacks, learn from them, and move on.

It sounds paradoxical, but mistakes and losses won't turn into slumps once you embrace those setbacks as opportunities to learn: to learn about markets, to learn about yourself. Every mistake is there to teach you something; you're either losing because you've missed something in the market, or because you did not execute an idea properly. Either failing is there to teach you something, to provide you with an opportunity to grow. We overcome losses by accepting and transforming them; it's when we fight them that they turn into frustrations and then slumps.

For more information related to slumps and positive trading performance, I've selected several past blog posts below for additional reading.


Why Traders Lose Their Discipline

Characteristics of Successful Traders

Improving Your Well-Being

Overcoming Performance Anxiety