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


markus said...

And sometimes you just lose because it is part of the game - and for no other reason (but it is such human trait to always look for some reason).


The Stock Speculator said...

As an athlete (so-so) I'll throw a comment in here. Athletes that are caught in a losing slump sometimes become so afraid of another loss, they forget exactly what got them to the dance in the first place. The losses mount and soon they are an also-ran as they become psychologically broken.

The great athletes I know get angry about their losses, but train through them. They always remain focused and positive. As you stated they always learn from the mistake and come out better.

I'm only a fair athlete, but I try to emulate the world class guys and bring some of it into my trading.

There is 1 huge difference with trading, you can always decide to just sit on your hands and not trade (compete). That time out has always helped me keep my mental edge. If the market isn't in my favor, I just won't trade.

I also try to take a lesson from the pro's I know. I go back and review what happened and where it all went wrong on a losing trade. I try to use the loss as an education - I did pay for it, I might as well get something from it.

Lastly, the single most important thing, for me, is constantly keeping a focused and sharp winning mentality. Once you start thinking about the mounting losses, you will lose again.

As always, a great read.

itrade4real said...

"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."

Excellent point on the negative feedback loop!

Jon said...

Great article... Much appreciated.

As always,


TTmarun said...

Brett, outstanding post, I'm one who can dwell on a mishaps for days on end. thx for putting those mishaps in perspective by giving a sequence or outline to review and learn from them.


procol said...

I've noticed that the volume profile for the ES seems a lot 'flatter' than usual . Not sure if its options expire or what.

What I'm seeking is theres quite a bit of volume during what used to be dead zones. Guess that makes some sense given the market stress.

John said...

Great article... I struggle with maintaining positivity in the face of a string of loses.

I set a stop dollar amount each month. I also have a stop amount for the last X number of trades. The latter forces me to stop for during losing streaks...

If I hit either of my stops, my account goes into a money market until it regains the money I lost. Which is usually about 2 - 4 weeks. During which time I study the closed trades, adjust my plan, start paper trading.

Somewhere in that time I manage to regain a positive attitude and focus.

Brett Steenbarger, Ph.D. said...

Thanks for the insightful comments; my experience is that the ability to constructively weather inevitable slumps is one of the hallmarks of successful traders--