November 12, 2007 at 6:50 am | | Comments 9

Overcoming Trading Disasters

Running a subscription-based stock pick service, I have the opportunity to interact with quite a few traders on a regular basis. In a group of that size there are diverse styles, varying risk tolerances and numerous trading timeframe preferences. However, every style offers the opportunity for the occasional blow-up to occur.

Trading Disasters

I get contacted by traders on a somewhat regular basis wanting some help getting back on their feet after a trading disaster. Sometimes these blow-ups are self-infliicted (overtrading, breaking rules, throwing discipline out the window, etc.), while others are market-inflicted (news gaps, downgrades, corporate investigations, etc.). Both kinds are hurtful to a trader’s account and psyche, but the road to recovery is similar for both situations…if they’re willing to walk it.

I can certainly sympathize, as I have definitely been there. Blown stops, overtrading, revenge-trading, throwing rules out the window…all of it can add up to a big nasty down day that was never intended or expected. I’ve felt the shock, disgust, frustration, and pure disbelief of days like that, and it is absolutely zero fun. If you’ve recently suffered a big trading setback, I won’t kick you while you’re down, but I’ll be honest here and tell you what I think you ought to hear.

Paying Market Tuition

We all have our “refresher courses” in market education, so since we’ve paid a high tuition we certainly don’t want to lose the lesson. As long as these occasional disasters don’t knock us out of the game, they can actually make us better traders if we’ll allow it. They really ingrain in us the things we ought to be doing. The wounds from such events take time to heal from and they do leave a mark, but that serves as a reminder to stick with what we know works and get back on the right track. Until a full recovery is made, looking at your account equity reminds you of how it happened. It will motivate you like nothing else to avoid letting it happen again. There is some value in that, even if we overpaid for it.

Don’t make a bad day worse. Whether you get kicked in the teeth by a morning gap against your overnight position or you’ve simply hit your daily limit on losses, it can be a very tall order to make it back quickly. Many a trader can relate stories of attempting a comeback from a trade gone bad only to dig deeper into their hole, ultimately finding themselves down farther than they were when their bad day began. Chalking up the loss and staying picky so as not to add insult to injury can prevent more pain and sometimes let you chip away at it. If you venture into the market beyond your “uncle” point, be selective and keep your risk to a minimum.

Honor thy stop. Many active traders have gotten to the point where they trust their ability to exit when the time comes, but there simply is no substitute for having a hard stop in place. Knowing the key levels at which you need to close out a bad trade is one thing, but pulling that trigger and abandoning hope of a rebound is something entirely different. Ugly days have a tendency to tug at our need to be right, but remember that the market is always right. Limit the damage you will suffer from losing trades, and keep yourself in the game so that you can recover from losing trades without needing a miracle.

Return to what works. After a blow-up, aim to hit singles and restore your confidence in such a way that it can be built upon. Reflecting on stretches of consistent profitability will serve as a reminder of what has worked, and that’s usually the ideal place to begin. Get back to hitting singles and work your way back up. You can do it and it will take time, but if you can establish some consistency now, it will pay even bigger in the future.

Avoid Temptation

After a trading disaster strikes, the urge is usually to try to make it back in one play, returning quickly to previous account levels. You can easily double your pain if you fall for it, but those who succumb to that urge may never ever recover. I’ve seen plenty of traders take that route, and before they know it they’ve let one bad day send them into a downward spiral, never to return. Additionally, finding temporary success by swinging for the fence right after a big loss will only reinforce the very bad habits which you need to shun. Avoid it if you can. You might recover this time, but eventually that approach will seal your fate – and not in a good way!

Instead, return to a methodical way of trading where you’re looking for a day’s pay. Give your account time to recover before you start looking for the bigger swings again. The trader who suffers a big hit is rarely thinking clearly, and he needs to get back on track before considering any aggressive plays. That can take a while, so accept that fact if you really want to be good at this.

Another thing to consider is just taking a break from the market. Take a week off, and the market will be here when you get back. What you don’t want to happen is that you look back on is this moment and know that you put yourself at a crossroads in your trading career when you didn’t have to. Don’t let a frustrating day get the best of you so that 6 months from now you look back and know that dealing with it poorly ultimately sent you packing. Let your emotions come down and cool your jets. That way you will return with a clear head and a defined approach you want to take going forward.

Soaking it In

We all have a tendency to want to forget bad experiences, but that isn’t the best way to deal with a trading blowout. Spending some time reflecting on the events can be a healthy step in the healing and recovery process. Re-live those emotions and let that bad taste sink in so that you don’t do it again. Many trading blow-ups come as the result of a lack of willpower, but growing passionately dissatisfied with the loss of control will certainly help to avoid a repeat offense.

Find every possible way to build consistency and eliminate risk on each trade, every week, month after month. It won’t always be roses, but it certainly will eliminate the blow-up factor. Coming up with a defined plan for every trade ahead of time will force you to add structure. Blow-up days distinctly lack structure, and when we have them we put on trades on a whim, spontaneously throwing money at the market wall and hoping something will stick. Long-term trading success isn’t built on that – it’s built on consistency.

If excitement is what a trader is seeking, then the market certainly offers it. But if an escape from a monotonous job and the hope of making a living from the market is the aim, then trading blow-ups absolutely must be avoided. Put a cap on your daily max loss. Put a limit on how many trades you’ll let yourself place – if you only had 3 to make every day for the next week, you’d certainly make them count I bet. Rein in the horsepower and get a bat on the ball for a little while. The money can come later after you find your groove again, but don’t let one trading disaster trigger a much larger slide.

Finally, wouldn’t it be satisfying if you were able to designate a point in the future, weeks or months away when you would have fully recovered and climbed back from such an awful experience? Wouldn’t that be a huge source of confidence for you going forward as a trader? I know it would.

Resolve to climb back, be methodical, and stay patient. You can do this!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

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  1. I like this article. I recently went through a blow-out experience which I would call the Blackstone-Crox effect since those two stocks wiped out my days of profits ($90,000) due to wrong position sizing and no stop loss.
    I have little equity left and am aiming to recover in the next 4 years.

  2. I like this post. In particular, ‘Avoiding Temptation’ and ‘Soaking it In’ are both rock solid advice and savvy real-world applications of what to do when confronted by our inbuilt hueristics of psychology in trading.

    Irrational Minds

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