Friday, December 04, 2009

Persistence and Emotional Resilience in Trading

In the past, I've written about the importance of emotional resilience in trading. The resilient trader is one who can weather setbacks without losing either self-control or self-confidence. The common element between the trader who goes on tilt and the trader who becomes gun shy after losses is a lack of resilience.

You don't gain resilience by winning. Rather, you become resilient by losing--and by seeing that you can learn from (and overcome) those losses.

One manifestation of emotional resilience is persistence: the ability to stick with a good idea, even when you get stopped out. Stopping out of a trade when it goes against you is a sign of discipline and is part of good trading. But sometimes we get stopped out and the underlying trade idea is still valid.

That happens most often when markets take out obvious resistance or support levels, taking out the stops that are often placed there, only to return to their prior trading range. An example of that occurred recently, when stocks plunged on the negative news coming out of Dubai. We shot below support around the 1084 area in ES, only to quickly move back above that level. Longs that were stopped out were wise to be persistent and re-enter, as we subsequently moved nicely to new highs.

Persistence is different from simply being pigheaded and sticking with a wrong opinion. Rather, persistence means that you don't give up on an idea if market action comes back to confirm your view.

It's easy to get stopped out when buy and sell programs run stops. But those occasions don't necessarily mean that the fundamental supply/demand situation in the market has changed. The resilient trader not only stops the position, but watches what happens subsequently. Just because you lose your position does not necessarily mean that you should lose your view.