Friday, October 23, 2009

Keeping Grounded as a Trader: How to Avoid Going on Tilt

Suppose a major league baseball pitcher became excited with each strike that he threw and discouraged with each ball that was out of the strike zone. If he walked a batter or gave up a hit, the pitcher would lose his temper and begin throwing wildly. If he struck a player out, he would become euphoric.

Such a pitcher wouldn't last long in the major leagues. He would be viewed as lacking professionalism. His extreme emotionality would interfere with the straightforward task of throwing good pitches and adjusting to each hitter.

It's the same in poker. If a player were to "go on tilt" after every losing hand, become exasperated with each mucked hand, and get pumped after each win, that would be an easy player to read. Instead of playing the odds, it's likely the player would be making decisions driven by the ups and downs of each hand.

There are many active traders who approach trading like the pitcher or poker player of the above examples. They become emotionally attached to the results of each trade.

For a successful trader, a trade is like a single pitch to a hitter. It is one part of one at bat, which is part of one inning, which is part of one game. The goal is to win the game, not to "win" on each pitch. When a pitcher walks a batter, the focus is on getting out of the inning successfully. When a pitcher has a bad inning, the focus is on finishing the game well. After a losing game, the pitcher reviews with the pitching coach and makes adjustments for the next outing.

There are plenty of games left in the season. The big picture keeps the pitcher emotionally balanced.

That is why, in working with traders, I focus on being profitable for the week and month--not on each trade, or even each day. For the active trader, there are many trades in a day and there are five days in a week. As long as you don't lose too much in a trade, you can turn the day around. As long as you keep daily losses reasonable, you have a chance for a green week. And as long as a week doesn't dig you into a deep hole, you can still be profitable on the month.

There are plenty of trades left in the week, month, and year. The goal is to have a successful season: that view makes it easier to shrug off the pitches that get away from you and focus on what is truly important.