June 26, 2008 at 12:22 pm | | Comments 3

More on Learning from Trading Disasters

The best way to stop a losing streak is to STOP!….Stopping lets your emotions calm down and lets you reestablish your momentum with your intellect.
– Marty Schwartz, Pit Bull

A couple of weeks ago, I received a pretty sad email. The trader who sent it had been losing money over the course of 6 years to the tune of $150k (yes, you read that correctly). He couldn’t stop. On this particular day the trader lost his last $16k gambling on an earnings release (the same gamble I caution against in my trading rules), sealing the fate of his account.

Another trader I know has really struggled to accept losses. Whenever she finds herself on the wrong side of a trade, instead of taking her medicine and stopping out, she often adds to the position and hopes her double-down is well-timed. In the past it has meant going through periods of inactivity while she waits for her stocks to come back, choosing to become a stuckholder rather than a trader. That hasn’t always worked either. Currently she’s stuck in losing trades with her capital tied up, unable to keep her money compounding due to her refusal to accept a loss and move on in expectation of making up for it elsewhere in another trade. She’s now hoping that the market will rebound to bail her out, babysitting those bad trades in the meantime.

Losing Control

Now, I don’t want to be Debbie Downer here 😀 , but the fact of the matter is that it happens all the time. Traders lose their heads, then they lose their way, and then they lose their shirt.

I continue to find reasons to harp on this lesson, and I suppose there will always be examples of the pain, frustration, and opportunity costs associated with letting losses get out of hand (my biggest trading fear). But to those of us who intend to survive, persist and succeed in the trading game, it’s worth occasionally stopping to examine the other side of the coin. After all, the mistakes of others serve as excellent reminders to us of what to avoid.

Get A Grip!

You might be struggling in this market right now, and if so, remember that there are a couple of things you can do. First, stop trading. Close out your losing positions and clear your head for a little while. It’ll be well worth it, both monetarily and mentally. Second, regain your focus. Remind yourself what you’re aiming to do with your trading, what your style consists of, and what you need to see before taking new trades. If you don’t see it, don’t push any buttons! And finally, don’t try to “get it back” quickly. That is the fastest way to compound your problem and double or triple the size of the hole you find yourself in.

It’s been said before that the market will expose your every weakness, and that’s certainly true right now, particularly if you’re biased to trading the long side. This is the kind of market environment that can bring the pain if you aren’t careful or in control of your trading. Fighting the current downtrend we’re in can make for a very tough road to travel.

As this market corrects, if you aren’t short, then cash is the next-best alternative until the technicals improve. So be very careful out there, don’t be a hero, and make sure you’ve got your game face on before getting active!

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