Thursday, August 21, 2014

Handling the Adversities of Trading

How do you handle adversity in trading:  when trades move against you, when drawdowns accumulate?  One of the interesting observations from the Market Wizards interviews was that many of the great traders had undergone periods of great loss prior to their success.  Hardships prepared them for an extraordinary career by teaching them important lessons about risk management, diversification, and sustaining psychological self-control.

How do traders trading today's markets handle adversity?  An excellent set of interviews posted by Richard Chignell on the Embrace the Trend site captures, in the traders' own words, how they deal with the emotions and challenges of trading.  The interviews also illustrate the great diversity of trading styles out there.

Among the gems in the interviews is the running from fire analogy of Charles Kirk from The Kirk Report; the use of visualization exercises from Mike Bellafiore of SMB Capital; the process focus of David Blair from The Crosshairs Trader; and Derek Hernquist discussing the importance of trade blueprints.  An interesting common theme among the traders was the value of physical exercise in managing the pressures of trading.

Where my perspective would differ from that of many of the interviewees is that I would distinguish between negative emotions resulting from particular losing trades and those that are more ongoing, resulting from failure to adapt to changing markets.  When a trader has a demonstrable edge, following plans and sticking to a replicable process will make the most of the positive expected return.  When a trader's edge erodes, those same actions can lock in frustration and negative results.  Sometimes traders experience hardship because they need to change their destinies.

Further Reading:  Adapting to Change