Wednesday, April 22, 2009

Trading on Tilt: Regaining Self Control

Here is a sequence I observe among many active traders:

It begins with uncertainty. The trader isn't sure which way the market is going, but feels the need to make a trade. Instead of sitting back and letting the market show its hand, the trader is leaning forward, hand on mouse, ready to pounce.

The market moves higher by several ticks, as one or more program trades take out a few levels in the ES futures.

The trader now expresses frustration, "I should have bought there." He leans forward even more, hanging on every tick.

The market ticks down, then up. It's a slow market. The trader doesn't see that the recent move up was on minimal volume and that the midday trade is quite narrow. Suddenly the market ticks up one more time and the trader can't take it any more. He lifts the offer with his usual size, afraid of missing the move up.

There is no profit target or stop loss articulated. This is not a trade designed with good risk/reward parameters, because there *are* no parameters. This is a trade designed to minimize the discomfort associated with not being on board for a move.

The market suddenly reverses and retraces its recent gains. Now the trader either has to get out with a loss or hang in there and hope for a reversal. His frustration builds, leading him to continue his overtrading, and making it more likely that he will stick with--and even add to--losing trades.

Our trader is not trading to make money. He is trading to regulate his emotional state. Once he becomes attached to the need to trade and make money--and once his perfectionistic voice of "I should have bought there" enters the picture--he is no longer grounded in markets. It's when those frustrations build over time, becoming self-reinforcing, that traders "go on tilt".

By staying physically relaxed in one's breathing and posture and by mentally rehearsing a mindset in which it is OK to miss moves--there will always be future opportunity--traders can prevent many of these train wrecks. The practice of taking a break during the trading day, reviewing one's state of mind, and clearing one's head is remarkably effective in this regard. Clearly identifying the parameters of one's trade--the optimal size, reasonable targets given market movement, stop loss points that put risk and reward into proper alignment--also ensures that you are controlling your trading, not the reverse.

There are many ways in which the body controls the mind. If you are not physically calm and collected, it will be difficult to make calm, focused trading decisions. By working at observing yourself as you trade, you gain the ability to interrupt destructive sequences and regain control. Ultimately, going on "tilt" is the result of a loss of self-awareness. Once you remember yourself, you'll be able to access your skills and knowledge.



JDMoodie said...

Guilty as charged.

Although I do have a stop and the move missed is usually just the best entry...sometimes the fact that the price came back into my buy zone, in itself, is not a good sign and I fail to recognize this sign.


ken long said...

i think our evolutionary brain was adapting to an environment of scarcity; 10M years of evolution have wired us to treat "missing a trade" as an important event.

Overcoming that hard wiring is non-trivial, but until we see the market as abundant with opportunities, we'll continue to be driven to react to missed opportunities to our detriment

Zen said...

Dr. S.,

Thank you for this magnificent post. I have actually identified this behavior in me as of late and have learned to control it by boosting both my confidence AND patience. When I stick to the style of trading that I excel at and tune out the background noise (i.e. the drive to be a part of every move, how much money other traders are making vs. me, etc.), then I do very well and am happy. Succumbing to the alternative is disastrous on my account.

You have been an incredible help for my trading, and I want to say thank you.

Lavonne said...

This is something I've struggled with, but I've been making steady progress following your recommendations in the Daily Trading Coach on setting a goal, repeating until it becomes a habit, and using emotion-anchored visualization work to bolster the effort.

For weeks now, my primary daily goal has been to have a plan for every trade with:

a. An identified profit target that provides excellent risk:reward
b. Knowing where I will add to my position if the trade goes in my favor
c. Knowing where and why I will scratch it if it starts to reverse and what else could make me exit before my profit target, such as a large seller/buyer or ECN stepping down/up, or a sudden violent change in the market.
e. A well-defined stop, and if I’m tired, it's pre-entered into the system

All of the elements aren't yet a true habit (today I closed out three winners before I should have), but I'll keep working on this set until I don't have to think about it anymore...and can move on to my next goal.

Best always,

adan said...

all i can say is, timely and needed ;-)

thank you much, brett!

Anthony said...

Definitely a top 10 post from Dr Brett

Soham Das said...

There is an axiom in Ancient China, and which I believe has travelled to India as well(or if viceversa, I dont know)

Never gamble. But if you must, decide three things,prior: the rules,the stake and when to walk away.

Its strange, perhaps this ancient quote spoke more about modern day trading success than anything else.