June 29, 2010 at 7:01 am | | Comments 2

Making it Back

Anytime the market makes as big and consistent of a run as it did from March 2009 to the April peak, there’s a growing confidence that invites new money to the game.  Those who were completely spooked in early 2009 saw an impressive rebound, not only in prices but in their willingness to participate.make-back-trading

Of course, the longer in the tooth a rally becomes, the closer the end of it naturally gets.  That’s unfortunate for some, but it’s simply the nature of risk in the market.  After all, those who step out on a limb first will stand to make the most if they’re proven right, while others who wait for more of a sure thing may be among the last to the party right before it ends.

It’s natural for someone who buys at or near the peak to quickly find themselves underwater, and at this point just a short time removed from the April highs, there are no doubt many folks who were late to the party now feeling serious pain.

That feeling of panic has set in for them, and in most cases, there’s no exit plan.  The failure to designate a safety net prevents level-headed execution of a game plan, so now they’re forced to think fast in the heat of the moment, sparking a slew of potential mistakes.  Making it back now becomes the primary goal, as if there’s something magical about getting out unscathed.  Nevermind the fact that the entry was made in hopes of turning an actual profit.

Exaggerating Errors

Traders face this dilemma on every timeframe when in a bad trade.  With a negative P&L on the day, week, month, or year, the focus turns from sticking with a strategy to doing anything that might get them out of the hole – and fast.

Along with this mindset comes an urgency factor which may not have been present before – uh oh! The sudden recognition that they might be perceived as having been wrong strikes fear in their hearts and now the race is on to erase the losses.

I’ve been there plenty of times, and it’s no fun.  But over the years, I’ve found several ways to reduce the impact of my errors.  Here are a few things I try to do when I find myself underwater:

  • Slow down. Often times the desire to just get into anything that might be moving means it’s also easy to overtrade.  Spinning my wheels won’t help my P&L, and it sure won’t help my objectivity.
  • Get selective. Rather than jumping quickly on anything that comes along, I’m going to be much more effective if I wait for the cream of the crop to surface.  Waiting for the best risk/reward opportunities to arrive means passing up many other plays along the way, and returning to holding a high standard for where my capital is allocated.
  • Trust your method. Some stretches of trading are better than others, absolutely.  At times it’s extremely frustrating, while other times it feels almost easy.  So there will be ups and downs, but over time my method has served me very well.  When I find myself with the wrong color P&L, I remind myself that I’ll eventually get my groove back, so long as I don’t stray far from my style.  As they say here in Texas, “dance with the one that brung ya.”

Translation for Timeframes

On a day trading timeframe, it can be tough to take a few hits early in the session.  Your confidence gets quickly shaken, and you wonder whether it’s just a tough start from which you can recover, or if instead it just isn’t your day.  The key is to avoid emotion-based decisions, which will lower your standard for trades and shift your attention to the money rather than the price action.  Never do you want your losses to cause you to force trades, so if that’s your primary motivator, get away and return another day.  If instead there are still ample opportunities for good trades, patiently wait for the best risk/reward setups and then make the most of them.

For a swing trading timeframe, streaks will happen where at times it seems you’re on the wrong side in every trade you place.  Making it back will take a little longer, but it can be done if you’re methodical about it.  Cut down your size immediately while you wait to find your groove, as that will slow the pace of your losses if you continue to time trades poorly.  Become selective, because confusion can set in quickly if you aren’t following a clear strategy with a known objective.  Patience will be crucial, but it can pay quite well, too.

Finding yourself down in a hole is no fun, but it’s a reality of trading that each of us will face from time to time.  So take a long-term view with your trading career, even if your timeframe for each trade is quite short-term.  Doing so will keep you level-headed when it’s the hardest, and it’ll make you tougher and better as you find your way back on the right side – and you will!

Trade Like a Bandit!

Jeff White
Swing Trading & Day Trading Service

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  1. Traders:

    Trying to get back to even is, in my opinion, a loser’s mindset. Your task as a trader is to make money with your current positions.

    If you get off to a poor start one day (week or month), it may be appropriate to take a break from trading and clear your head. It is NOT appropriate to increase size and risk in an effort to get the portfolio value back to some level it had reached earlier.

    Concentrate on each trade as a stand alone item and avoid trying to squeeze extra profits in an attempt to return to those ‘thrilling days of yesteryear’ when your account was larger. You are not the Lone Ranger.

    You are working as a trader and your JOB is to make money today and tomorrow. Your JOB as a risk manager is to see that your trader persona understands this issue.

  2. Hey Mark!

    Thanks for your thoughts on this, I couldn’t agree more. And the memory of an account high is an added motivator not often used in an appropriate way, I’m glad you mentioned that as well.

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