Wednesday, May 27, 2009

How Do I Handle the Mood Swings of Trading?

A reader asks the question:

"How do I avoid the inevitable mood swing when a couple of trades go bad? For a few days in March I was afraid to get back on the horse and had to tell myself to jump back on/trade as the only way to get over it."

My response is that you'll *always* have situations in which "a couple of trades go bad". If you average 55% winning trades, you'll have two consecutive losers about 20% of the time. For the active trader, that means that "a couple of trades go bad" occurs every week, if not daily.

Mood swings when trades go bad are *not* inevitable. The professional trader *plans* to be wrong and manages positions accordingly. That trader knows that you can trade well and still have a couple of trades go bad. Embracing risk and uncertainty, the successful trader limits losses by controlling position sizes and establishing loss limits (per trade, per day).

The good trade gone bad often provides a trader with valuable information--if the trader is open to the message. Today I worked with a trader who tried to buy the market in the afternoon, only to get stopped out. Shortly after, he noticed weakness in the 10-year Treasury notes and reversed his position. By day's end, he was profitable by a healthy six figure sum. The "bad trade" offered opportunity, not threat.

If you do experience mood swings around losing trades, it's probably because you are evaluating yourself by the criterion of being right--not by the criterion of trading well. It isn't the losing trade making you feel bad; it's the perfectionistic expectation that you should always be right. By embracing uncertainty and staying open to learning from it, the threat of losing can turn into the opportunity of rethinking market assumptions.