Friday, December 19, 2008

Breaking Trading Slumps by Becoming Your Own Trading Coach

Here is an email from a developing trader that I believe all of us can relate to. It offers an outstanding opportunity for self-coaching:

"Is this month's ES market so different from September? November? As you may recall, I am new at this game. I have been working my tail off training to trade the ES by trading for real, but tiny in SPY. May is when I began to develop my current approach. As I am a newbie, the approach/strategy has morphed as I learn. In my practice trading, I achieved really quite good results in the fall. I make many discretionary decisions, but my most firm rules are for risk management. So, I think there is some consistency in my approach. But I would not describe my trading as very consistent. I have disciplinary lapses, but I am learning about them all of the time and the progress is good. December's results are horrible, however. No big losses, which is my strength. I keep them pretty small. But this month, so many losers! I am just so confused about it. I am looking at the same things, thinking the same way; I am not under any more pressure than I was in the fall...What the heck is going on? Is this par for the course for a guy who has been trading the ES for 6-7 months?"

There are two major reasons for traders entering slumps: 1) changes in their life situation and/or mindset leading to their getting away from strengths and sound trading practices; 2) changes in markets, especially with respect to trend and volatility. In the first scenario, the trader changes how he/she trades and loses money. In the second scenario, the trader trades the same under different market conditions and loses money due to a failure to adapt.

Our trader asks the question whether this month's stock index market is so different from recent months. As the monthly chart above suggests, the answer is yes. December is shaping up as an inside month, with a far narrower range than prior months. If we drill down to a daily level in SPY, we find that the average high-low range has been 4.34%, down from 5.83% in November and 6.74% in October. In the last two weeks, the average daily range has been 3.89%. In short, we have lost both trending and volatility in December.

Note that our trader prides himself on having "no big losses". In the current month, however, he has had many losing trades. The first thing I would investigate as his trading coach is how often he has been getting stopped out on trades that begin as winners and how often he has been stopped out of trades that not long after would have been winners. If he has not adjusted his stop-loss levels for the changes in the market's volatility, he will wait for larger moves than ultimately materialize. The trade starts as a winner, but eventually reverses against him. If he has overadjusted to the market's reduced volatility, he would set stops too tight and lose money on normal whipsaws before the market eventually goes his way. Both are very frustrating scenarios.

The other thing I'd look for in his trading is whether he is buying strength and selling weakness in the execution of his ideas. You can get away with that in trending markets, not in range markets. Once you buy into strength or sell into weakness, you are subject to normal reversal and can be stopped out of trades with losses frequently. The more range bound the market, the more important execution becomes. You have to wait for your prices, not chase moves.

On the psychological side, it's clear from the tone of the letter that our trader is frustrated. While frustration may not have been the initial cause of the slump, it can be instrumental in sustaining the slump. I'd look for changes in the sizing and frequency of trading, as well as changes in execution, as signs that frustration might be affecting decision-making. When I am frustrated with my trading, I have learned to take time away from markets and return with a clear head. Very often, that leads to a fresh view and much better trading.

Finally, our trader asks if this is par for the course for developing traders? The answer is yes. Slumps are common, even to seasoned professionals. The key is diagnosing the slump early, reducing risk exposure before losses become serious, and instituting corrective measures. It is very common for intraday traders to lose sight of shifts in trending and volatility and fail to adapt to market conditions. This often starts a slump; frustration often keeps it going. If you drill down and look at your trades in detail--what happened before and after--patterns may very well jump out at you that point the way out of the slump. That drill down is best accomplished, however, after you've stepped back and gotten out of the frustrated mindset.

For more background on breaking trading slumps, check out this post and its links.


Attitude Trader said...


It seems that when we're new to this game we search and search for that perfect trading method. Then we get much more experienced and sophisticated and what do we do? Search and search for that perfect trading method!

It sounds funny but as you've stated it's also very frustrating. The more I go through it however, the more I'm becoming aware that I'm continually repeating that psychological cycle. And the more it makes me realize that there are a lot of valid and profitable ways to approach trading, but my attitude toward my trading is by far the most important aspect.

And again, as you've said, the only real way to get clear about the most effective course of action is to get out of that frustrated state of mind. Attitude is everything.

Thank you for this kind of post. It's a great eye-opener to some and a great reminder to others.


fire up your rear said...

don't you think it's ridiculous to see all these trader hopefuls wanting to turn their $5000 to millions?

i mean there has been a great influx of new traders out there who watch fast money, grab a few books off amazon, scour the web for trading videos, and they think they can quit their job and start trading the most highly leveraged instruments hoping their small account will triple within a year

and there are ridiculous number of college kids too who want to trade for a living

this is quite telling of our current economy

people don't want jobs, dont have jobs, cant deal with the pressure, and they want to strike it rich from the comfort of their home

no different than obese people wanting to lose weight fast, and easy

no different at all

and it's quite interesting that all these people come back and bad mouth cnbc, which was the reason they got into the market in the first place, and they pray for the market and the economy to tank so they can make $300 on their shorts

it's quite ridiculous what trading has become

people having false hopes and learning about trading in chat rooms


JMJAtlanta said...

As a recent slump graduate, I can attest to this. I tweaked my setup to avoid losing trades, and destroyed my tried-and-true setup. I initially blamed the market changing. A review of my trades showed the true answer. I am so glad my journal was there. It makes me wish I could capture even more info, and go deeper into the analysis.


So let's say I start a trading log in Excel. Can you suggest some categories (columns) I might want to track for every trade?

Johnny said...

@Fire... You'd probably be more productive if you kept a focused, positive mind. The conditions you described have been around since the dawn of the market, to suggest they are exclusive to the end of 2008 is idiotic.

Anyone actually making money should be grateful for the stream of new interest and capital into the markets.

Swingtradingideas said...

Markets are dynamic and one should not try to fight with it .
Kudos to you for bringing up this topic.
I have overcome with this problem by stopping trading for a while and revisiting my trading diary and system to see if something has changed.