All Entries in the "Trading Psychology" Category
How to Think About a Loss
October 26, 2011 at 12:58 pm
We all lose here and there, it’s just part of trading. You can’t avoid it, but that isn’t the issue. Where many traders struggle is how to handle a loss gracefully.
Instead if equating a trading loss with personal failure, shift your mentality for what a loss means.
Does it mean you’re stupid? Not necessarily.
Does it mean you were wrong? Yes, in at least one way.
Does that mean you will never get it back? Absolutely not.
Losses are an event, yes, but it’s also a distribution from your account. Consider them a cost of doing business as a trader. Brick-and-mortar stores have overhead, but as a trader, the biggest portion of your overhead is the losses you take.
When businesses cut costs, they’re reducing their overhead as much as possible to fatten their profit margins. Do the same with your trading. Reduce your ‘loss overhead’ by accepting a loss quickly and moving on to the next trade.
It’s much more fun to always be adding to your account rather than seeing funds flow out, but as soon as you start viewing trading losses as something impersonal, it’s going to change your perspective in a very helpful way. Rather than fret over them and allow losses to cloud your thinking or alter your mood, viewing them through the proper lens will help you more quickly get them back and then some.
Like it or not, trading is a business…how are you managing yours?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
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3 Ways to Overcome Your Fear from Past Trades
October 18, 2011 at 9:44 am
Traders are a skittish bunch. We can make the same trade 100 times, but the one time a left-field event occurs, it can spook us forever.
The other night, I let the dog outside before bedtime. He’s a 7-year old Boston Terrier, so I’ve done that literally a couple thousand times. This time, however, he returned to the porch with an unusual look. I knew what happened before I even opened the door, because I could smell it…he’d been sprayed by a skunk.
An hour later after thoroughly bathing him outside, our house still reeked – despite not letting him in until he’d been bathed. And let me just say, fresh skunk spray smells nothing like roadkill skunk. It’s WAY worse.
Thankfully, the stench is long gone now, but that single event conditioned me, and I’m concerned now when I let him out every night…all because of that one awful experience! Doesn’t seem right, does it?
Spooked By The Past
In trading, we have to remind ourselves regularly to remain in the present tense. Because this setup burned you last time doesn’t mean it will this time. Maybe your first couple of trades of the day were losses, and now you’re scared to touch another trade. Or perhaps you’re coming off a tough few months and you’re afraid to get back in the mix.
While respect for the market and quality risk management are of utmost importance, what I’m referring to here is the crippling fear that’s costing you. It’s the fear that’s preventing you from elevating your performance, or from digging out of what should be a manageable hole. It’s the kind of fear that has you paralyzed and unable to pull the trigger on anything.
Return to Trading Confidently
Here are 3 Ways to Overcome Your Fear of the Past:
1. Understand your odds for success. This of course includes an honest risk assessment of the play, but it also means knowing whether this type of play is likely to work given the conditions. Going over your results consistently will reveal which kinds of plays are working in the current environment and which are more likely to fail. If you understand your odds for success and you’re able to have some mathematical confidence, it would be more costly to skip the trade.
2. Understand failure. Knowing the worst-case outcome if this trade happens to fail can reduce the fear inflicted by a previous failure from an unseen event. Black swan events aren’t common, so it’s not reasonable to fear them every time you approach a setup. Weigh the potential for loss, and if it’s outweighed by the potential for gain, the probabilities are favorable enough to participate.
3. Choose to move forward. All of us have the ability to choose, whether it’s our career or our spouse or our attitude. Maybe your fear somehow gives you comfort right now, because it’s been a habit you’ve allowed. That won’t cut it though, so it’s time to change. Eventually, you either decide to get back on the right path, or you’re completely done trading. Make your choice and get on with it – and don’t look back.
Don’t let the past haunt you into skipping potentially solid plays. Assess your risk, and then take the trade confident that over time, the numbers will work to your advantage.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Follow TheStockBandit on Twitter or get our free newsletter to keep up!
Contrarian View
October 5, 2011 at 8:03 am
Just for fun, let’s look at both sides of this market, pretending there are actual bulls out there. (All kidding aside, there are, even if they’ve been M.I.A. of late).
This market has been plenty heavy of late. The big moves I’ve caught recently have all been on the short side, and bearish consolidations abound in the charts. Simultaneously, bullish setups are few and far between, to say the very least.
But let’s look at the bullish case right now. If I’m leaving anything out, please share it in the comments, but here are a few things to consider regarding those who are counting on a lasting turnaround:
– Nowhere else to put cash right now. This is true, and a biggie. With the bond bubble keeping money managers quite leery, and precious metals already correcting sharply from their recent highs (have you seen gold?), the so-called “safe havens” haven’t been immune to the selling either. Equities are still seen as the place to be going forward.
– Multiples are contracting, value players getting more interested. The biggest difference between a technician and the fundamentalist is how momentum is viewed. Fundies look at low prices as entry opportunities, whereas technicians look at them as downtrends which may continue. These days, the value players are seeing better numbers, which may get more of them involved.
– EVERYONE seems to be sitting on considerable cash piles right now. If this market catches a bid, that cash is tremendous potential fuel for a lasting rally. As prevalent as fear has been on the way down, it will also be relevant on the way back up — who wants to miss the big rally? Nobody who runs money, I can assure you. Underperformance is worse than losing money (sadly) in the world of portfolio managers, so you can fully expect cash to come off the sidelines quickly when signs of stability finally emerge.
The bear is still alive and well, with fresh 52-week lows being made Tuesday in every index. Nonetheless, it’s always wise to look at the other side of the trade. It’s responsible, and it either lets you keep defending your stance or it presents reasons to shift (which the best traders are always willing to do).
Keep an open mind, nothing is ever out of the question in this market.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Follow TheStockBandit on Twitter or get our free newsletter to keep up!
Which Side Are You On?
September 2, 2011 at 8:22 am
We’re in an interesting spot here, no matter which side you find yourself on. Both the bulls and bears have reason to believe they’re going to win this one, so let’s take a brief look at the arguments of each.
From the bullish perspective, we’ve just carved out a higher (incremental) low compared to the early-August low, which was confirmed by a higher high this week (including multiple closes above the mid-August bounce high). We’re now pulling back after a sizeable short-term run, possibly to fill the gap from 8/29. A change of direction begins with the creation of a higher low and higher high, and we’ve seen both of those get created. The worst is behind us.
Here’s the SPY daily chart with notes for the bullish case:
From the bearish perspective, this is a low-level (albeit wide) counter-trend consolidation following a major decline. Advances have not seen meaningful follow through…the 8/9 to 8/15 bounce was met with nearly a complete retracement, and the bounce which completed August is again coming under some pressure here. This correction is just getting started.
Here’s the SPY daily chart with notes for the bearish case:
Charts don’t lie, but at times like this it’s all about perspective. The next direction is in the eye of the beholder, and that’s exactly what makes a market. What’s your perspective?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Follow TheStockBandit on Twitter or get our free newsletter to keep up!
Intelligence is Only Part of Trading Success
August 24, 2011 at 10:46 am
In a recent conversation with a trader who had just accepted some small but frequent losses, it came to light that his emotions were flaring. Taking a small loss here or there doesn’t affect him, but taking a few in a row does.
What’s interesting though, is that it wasn’t the money that bothered him so much. It was the fact that he came to doubt his intelligence after a string of losses.
Every one of us has been there, and it’s no fun. Losing is a part of trading, and each of us knows that, but how we cope with those losses will determine how quickly we rebound from those hits that inevitably come.
Here are 3 steps I suggested he take…
1. Trade smaller. If you’re getting frustrated and angry, it’s a sign you’re placing too much importance on each trade. The way to diminish that is by reducing your size for a little while so that trades take on much less importance and you’re simply focusing on managing them properly.
2. View losses differently. Losses aren’t fun, but when viewed in a different light, they can be seen as helpful. They will make you better, because you scrutinize your mistakes and either learn something new or get reminded of a lesson you’ve previously learned. Losses also free up your capital and attention to shift toward another trade which may quickly overcome that loss.
3. Expect losses to happen. This isn’t negative thinking, but rational thinking. Begin each day knowing you might take several trades, and some might be losses. That makes it easier to accept them when they happen and it allows you to keep moving without letting emotions take over. Expect winning trades as well. And be sure you’re stopping out for smaller losses than the winning trades are providing. That will keep you net profitable and that’s the aim.
Remember, being right every time is not the aim of trading, so get out of that mindset as soon as you find yourself in it. Intelligence is only a small part of trading. Trading is a numbers game, and it’s one that requires you to deal with emotions rather than allow them to flare. Those who have an edge and who can manage emotions (tied to both losses and gains) are the ones who will succeed in trading.
What else would you tell this trader?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Don’t Let Trading Be Everything
August 2, 2011 at 2:15 am
I love trading – it’s such a challenge with multiple rewards. I look forward to it, I think about it alot, and I’m passionate about it so I work quite hard to continually improve at it.
But it’s good to constantly remind myself that trading isn’t everything.
It can’t be. There’s too much more to life than just watching numbers and letters on the screen. Trading is a means to an end, and for each of us that may be something different. What we have in common though is that we have to keep trading in perspective.
One of the ways to ensure you’re doing that is to have off-the-screen goals. Maybe you’ve got another hobby or you’re a runner or a cyclist or a golfer or you have a side business. Whatever “it” is, the good thing is that you have it. Don’t view it as a distraction – think of it as a necessary diversion.
Thinking about your trading constantly shows that it’s important to you, but it borders on obsessive and that’s not good. Inevitably, there will be tough days filled with frustration, and that’s not something worth fixating on. Being able to walk away from your desk and shift your mind to something else (once you’ve reviewed your trading session) is critical to your ability to return tomorrow mentally prepared.
Check out this post for more of my thoughts on The Importance of Off-the-Screen Goals.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Take Time to Rest & Relax
August 1, 2011 at 7:15 am
This week I’m on vacation – and how sweet it is! But I’m still going to deliver some goods for you to read here…every day, actually, so keep coming back.
Today I wanted to discuss the importance of stepping away from the screens from time to time to rest up and recharge. The market will always be there when we return, but if we trade with fatigue of any sort (physical, mental, or emotional), we’ll be far from our best. That brings suffering to both our confidence and emotions – both of which we need in this game.
As you well know, trading is very demanding, so for us to show up each day with our full focus, we have to stay rested and avoid burnout.
I felt this post from the past was particularly pertinent to the current market environment. We’ve seen lots of day-to-day indecision, some sizeable gaps, and some wide-ranging bars in both directions lately. That’s not allowing many stocks to establish quality bases, which means the opportunity that’s out there is rather narrow at the moment. That will at some point change, but for the time being this is a good time to step away and let some of the dust settle.
Check out this post: The View From the Hammock for more of my thoughts on R&R.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
