In response to an email I received tonight about regaining trading confidence after a big loss, I want to explain the process I go through to hopefully shed some light.
One of the first things you read when studying the craft of trading is that you can expect to lose. Some lose big, some lose often... but regardless of your trading skill, regardless of the size of your trading account, everyone loses. The sooner you come to accept this fact, the better off you'll be.
That said, one of the most over-looked, brushed off, not-talked-about parts of losing, is how to cope with your loss(es). Trading has a way of taping into all the dysfunctional behaviors/ experiences you had during your adolescence and into adulthood - denial, sabotage, lack of self-confidence... the list goes on and on.
If you're to succeed as a trader (however you define that to yourself), which is a realistic possibility, you have to take care of your emotional self. You have to be honest with yourself. Because believe it or not, this is huge part of becoming a "disciplined trader".
I'll use two of my experiences to further emphasize this point...
For those that read this blog regularly, you know of my COIN and HSNI experiences. COIN was my first great lesson. It almost sunk my ship because I failed to cut losses quickly... because I was in denial that it would keep going up; maybe a bit of self-sabotage, and a whole lot of ego aka being to proud to take a loss.
I stopped trading for 2 weeks. I to allowed myself time process all the shit that was going through my head... like what the f*ck just happened. What did I do wrong? Why? How? You have to be introspective and honest with yourself if you're going to grow emotionally as a trader... and as a person... become disciplined.
A couple months later, my past decided to re-visit me... and I lost for the same reasons! NOTE: This was the day the market decided to surge 900 points in two-hours, which is unheard of in real life. But still, I was up $1300 before I walked away from my computer to get lunch, didn't put a stop in place and convinced myself that it was going to 5 that day!) because I wanted to be a big shot... well I ended up losing close to $3,000 that day instead.
The positive that came after giving myself time to absorb and process and clear my head from these losses was on my first trade I made over $1,000, both times. Call is blind-luck.
Bernard Baruch said if out of every 10 trades you make, you have 3 or 4 profitable trades, you're doing well. That's a 60-70% failure rate and you're doing well! Think about it.
Bottom line is you have to take care of yourself - mentally, emotionally, and spiritually (whatever that means to you). Whatever keeps you honest with yourself and where you're at in your head, acknowledge it. Don't pretend what your seeing on the screen isn't really happening either because it is. Don't beat yourself up, that just causes more of the same negative shit and you end up making more mistakes! Don't be afraid to lose! It's part of the game, get perfection out of your head. And of course you have to believe in yourself.
Finally remember Noob's rules of engagement -
ENFORCE SELF DISCIPLINE - If you are going to achieve any success, this is paramount. No excuses, no exceptions!
BE PATIENT - Let the process go through it's process... don't rush it, don't force, trust it.
CUT LOSSES QUICKLY (3-5%) - The #1 indicator as to whether you're a disciplined trader or not. Do this without thought; this should be automatic.
See you in the trenches!
BottomFeederMillionaire (can someone tell me how to center this??? THANKS!)
8 comments:
Noob, thanks, I love these posts from you!
Just a general question, how do you justify making money as a trader? What value are you contributing to society?
I make money myself, and am thinking of how to justify my conscience that I am doing something worthwhile and not just ripping off the 90% losers.
I think I might have a better way to phrase my question.
Suppose you are a full time trader, and your child asks you for you do for a living. How would you answer him?
Just a general question out of curiousity.
WOW!! Thinketh… Do you ask the same question of your local grocery store when you buy a pound of hamburger, chicken breasts, fish fillets? How about when you child asks you where hot dogs come from?
Chances are as a day trader you are taking money from fellow day traders not long term investors who buy and hold. What’s up with all the anger and hostility?
Sorry Thinketh, I reread your comment and I think I mistook your initial post. I am sorry if I mistook your comment as a attack against Noob.
Thinketh,
As a trader, your primary banefit is to provide liquidity to the market and to establish a constant value of a stock (and therefore, an up to the second valuation of the company in which you invest short-term).
If everyone were buy and hold, how do you get market price? What is the company worth on a per-share basis?
The reason for so much agony and calamity over the current mortgage-backed securities mess is a lack of a market for them. No market, no price. No price, no way to value the asset; balance sheet agony! Distress! Bankruptcy!
What we do is crucial to the proper functioning of a free-market economy: note the word "market" in free-market. We are the market!
In return for this service we provide, we are entitled to a profit on our investment; return for risk. Just like in main-street retail, those who are better or more efficient at it will profit more, those who do it poorly will lose.
Capitalism is as beautiful as a summer sunset!
A child would be proud!
bluecollartrader, thanks for your insightful comments.
noob, you might already have come across the following if you have read Trading in the Zone by Mark Douglas (author of Disciplined Trader which you wrote about previously). I sometimes find his books too dry and abstract (especially those metaphysical stuff), but he does offer good suggestions.
5 Fundamental Truths, 7 Principles of Consistency
1. Anything can happen.
2. You don't need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Eveiy moment in the market is unique.
1. I objectively identify my edges.
2. I predefine the risk of every trade.
3. I completely accept risk or I am willing to let go of the trade.
4. I act on my edges without reservation or hesitation.
5. I pay myself as the market makes money available to me.
6. I continually monitor my susceptibility for making errors.
7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.
Noob,
I know you are busy but it would be nice if you create a post about your several 1$/share trades!
Have a good weekend.
RJ
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