Trading Psychology

Here are Trading Psychology - Coping With Not Winning All the Time that you must known.  

When I first started trading, I always had this idea that once I perfected my chart reading, virtually all of my trades would be winners. When I discovered a setup that worked once, then twice, and again, and again, I figured all I had to do was play those and they'd always work out in my favor. The idea that at certain times these plays would work wonderfully and other times not nearly as well, hadn't even crossed my mind. The truth is that the market is a completely dynamic environment, constantly changing and evolving. The breakout setups that are running today may completely fail tomorrow. If you have X amount of success one year and expect to repeat it over and over again doing the exact same thing, you're likely in for a rude awakening.

Since my trading strategy has always primarily focused on playing penny stock breakouts in one way or another, I've been pretty much at the mercy of how well they're performing as a whole. In 2009 when everything was running, obviously my strategy was working well for me. 2010 so far hasn't been nearly as favorable to the bulls, and you can see that in the form of less breakouts that are triggering, and the ones that do trigger aren't running as hard as we saw last year. There's still money to be made here, it's just not coming as easily as it did in 09. Like I said, the market is dynamic. It changes all the time.

This post isn't really meant to discuss the current market climate. While everything may not be running like Carl Lewis on speed, there are still plenty of nice setups and a fair amount of them have been triggering. Things may improve or get worse, I don't know what to expect and when to expect it, but I'll do my best to stay in sync with what's going on and adapt to it. In a perfect world, a trader can change up his styles and continue to make a killing in any environment, but I can admit that's not the case for myself. While I'm constantly trying to evolve my trading and become as versatile as I need to be, it's a long process and is easier said than done. At this point though, my way of thinking is this: When my main strategy is working well, I am aggressively exploiting it for everything I can. When it's not working to that same degree, my aggressiveness should adjust by that same amount, so if it gets to the point where my strategy is just plain old not working, I'm not using it. My reasoning is that I can make enough during the good periods to more than make up for slow periods, or even times where I'm hardly breaking even or in the red. I'd love to make money every single day, but the truth is I just need to make enough as a whole to pay my bills and live comfortably. If I can make enough during half the year to pay me for the entire year, then my main objective the other half is to at bare minimum not give too much of it back.

That brings me to the point of the article, and that's dealing with losing. Every trader is going to be different, so every trader is going to need to address this issue and personalize their methods and mindset to their own situation. One reason I like playing breakouts is because you can fairly easily minimize your losses and drawdowns. First off, are there any breakout setups popping up during my scans? If yes, how many? Second, how many are triggering? Finally, when they trigger, how are they performing? If I'm not finding a lot of setups, then I'm not playing breakouts, simple as that. If I'm finding a lot of setups but they're just not triggering, once again I'm not playing many breakouts. If I'm finding a good amount of setups, they're triggering, but just not running very hard or they tend to fail more than normal, then I tone down my position size and take profits earlier than normal. This isn't a black and white issue where they're either on or off, the degree to which they are or aren't working can almost infinitely vary.

So how does this relate to psychology? Well, I can tell you from experience that when my strategies are working well at the moment, I'm happy and confident. I'm proud of myself for doing something for a living that not many people can claim to do, and I'm sure that I'll be able to do this til retirement. These are the easy times to be a trader. On the other hand, when my methods stop working, I get stopped out of multiple trades in a row, and I start to go weeks or months without really making anything, the doubt starts to creep in. "Can I continue to do this for a living?" "Damn, it's been months since I had a really good trade." Worse yet is when I start to force things and really start to do damage to my account, then I start thinking how I just gave back months worth of profits in such a little amount of time. Doubt, panic, lack of confidence, etc., these are all things that will creep into your thought process at some point, at least if you're anything like me and most every other trader out there.

The whole process of trading is a cycle, at least that's the way my brain sees it. I started out not knowing a thing about trading, but completely confident I could succeed at it. I had some early luck and my confidence went sky high, which quickly hurt me since my level of skill and expertise was nowhere near my confidence level. It didn't take long before reality set in and I wiped out my small account, which humbled me in a hurry. Now I was no longer overconfident, in fact my confidence was so shattered that I started to have doubts about whether or not my dream was realistic. I stuck with it, continued to learn and improve my skills, and eventually it translated into more success. Success bread confidence, and that slowly once again turned into overconfidence. Overconfidence in trading usually means aggressively trading (taking setups that don't quite meet your criteria) with larger lot sizes than your rules would dictate, and that in turn leads to large losses. Large losses lead to doubt, and doubt can quickly deflate your ego bubble. So the cycle (necessarily) starts over, but ideally you're continually taking a few steps forward for every couple steps back.

As much as I hope writing stuff like this helps others, it also helps remind me of important things that I tend to forget, and truly drill them back into my brain. After last year and the success I had trading, my confidence had never been higher. That turned into me becoming extremely aggressive in my position sizes, and when the environment changed, it lead to larger losses than I'd ever seen. Instead of quickly recognizing and adapting to the not so bull friendly conditions, I went into revenge mode and tried to counter those losses with riskier trades, hoping that I'd make back a large chunk of the money I was down. That obviously is against all the rules that brought me success in the first place, so not surprisingly this didn't work out well for me, and the large losses brought back those little voices of doubt in my head. According to my cycle theory though, this is what was necessary to bring balance back into my trading. My large losses weren't because my methods and rules were failing me, they were because I was failing to adhere to those rules and methods. The tough thing for me was that because I'm at the mercy of the market and it's conditions, adhering to my rules and methods wasn't necessarily going to get me back to making big profits right away. Still, before you can even focus on making money in the market, you need to make sure you know how to protect the capital in your account. If I'm forced with the decision of treading water long enough to ensure I survive over the long run, or panicking and hoping that I don't drown in the process, I need to choose the safe route to give me the best chance of survival.

It doesn't take an extraordinary trader to make money during periods like the bull market we saw in 09, but it does take a special trader to survive the drawdowns and stay afloat long enough to be in the position where they can capitalize during those periods. Losing, or at minimum not always winning, is an aspect of trading that every trader must deal with. My advice is to be aware of and embrace the cycle, hopefully minimizing the negative parts and capitalizing on the positive ones. Losses and doubt will help force you to analyze your actions and mindset, and that should help you get back to the roots of your rules and system. Maybe some day I'll have repeated the pattern so many times that I'll no longer be at it's mercy, but for now all I can do is be aware of it and work with it, using it to help me progress.