Wednesday, April 01, 2009

When Trading and Trading Losses Spiral Out of Control

A frustrated trader writes to me, "I was searching for something that would aid me in making decisions in trading the index on a 3-10 day swing basis, but I am failing again and again. I think I have failed more than 10 times and swore 10 times that I will not trade again. But I come again with new money and donate it. Can I stop it??? You are the only person who can help me in stock trading in real terms."

Every week, I receive emails similar to this one. Traders have lost money, are desperate for success, and seek my assistance. We hear many breathless stories, promoted by the industry, of those who have made it big or who seemingly effortlessly trade for a living. What we don't see is the tragic financial and human toll among the 80+% of people who do not succeed at trading. I give major credit to the trader who wrote to me, for the honest self-appraisal.

What advice can I offer the reader? Let's take the reader's words in turn:

* "I was searching for something..." - I wrote the trader performance book to better understand how traders progress from being novices to becoming expert. What I found is that much of trading expertise is the result of long hours in front of the screen, properly structured, internalizing patterns of market strength and weakness. The key to trading success lies in the cultivation of our own pattern recognition (and our ability to act on patterns); not on a search for external answers or grails. There are no gurus with answers.

* "Trading the index on a 3-10 day swing basis..." - The reader is competing against many hedge fund portfolio managers at that time frame. To succeed at that time frame, you have to be good at picking up catalysts for multiday price shifts (significant news items, shifts in central bank policy, etc.), and you have to be good at picking up intermarket themes (how interest rates and currencies affect stock markets; how markets overseas affect the U.S., etc.). If you don't have a handle on those patterns, your odds of success are vastly diminished, as markets will move without your understanding why.

* "I have failed more than 10 times and swore 10 times that I will not trade again. But I come again with new money and donate it. Can I stop it???" - This is not a problem with trading. It is a problem with addictive behavior. When people engage in activities that are designed to bring a "high", experience painful consequences, but cannot desist from the activity, that is the hallmark of an addictive pattern. Please evaluate yourself honestly and check out this trading addiction linkfest if you think this problem might affect you.

* "You are the only person who can help me." - This blog, the Twitter posts, and all my books will not be helpful if you don't possess self-control. Addictive patterns of behavior rob us of self-control. The one piece of advice I can give is to seek professional help from a psychologist experienced in working with addictive behaviors and then, if you're still interested in trading, build your learning curve in simulation mode before risking any further money. Only when you're consistently successful in simulated trading should you put your capital--and your emotions--at risk. Simulated trading is the not the same as live trading with real risk/reward, but if you can't make money on paper, you surely won't make it when the pressure is on.

If trading is your path, the learning curve should not be a tortured one. You need a certain degree of well-being to sustain the motivation and concentration needed to sustain your learning. Most of all, you need self-control to develop and follow trading strategies that build upon your pattern recognition. Before you work on the markets, it may be necessary to work on yourself and regain that self-control.