SD Trader left this comment this morning:
I appreciate the overview of your daily trading. It appears you have quite the set up over there. How long did it take you to start trading successfully (and consistently)? I have tried to look this one up in the archives but it appears once you left your old job you have just always been great, even though you are still getting better. I wish you continued success and I am trying to learn from you as I have been reading for several months now.I have a problem though and it is killing me. I have had several nice gains but I am not good at losing. I tend to move my stops and hold onto falling stops. For some odd reason the further down it goes after this mistake the longer I hold...you can see the cycle here. It is a painful lesson to learn as just two of those losses put me back to break even after a long decent trading run.
Do you have any advice on how I can kick my addiction to falling stocks?
Like I said this morning, I could write a book in response to this but I'll try to keep this brief. First, I certainly wouldn't say that I've ever been a great trader. What I have been, for the most part, is disciplined. But I've had my slip-ups and challenges and there are plenty of examples of that in the archives. Just a few of which are:
- Me whining about selling too soon back in 2004
- OSIP gapping 20 points against me
- My recent trading results which shows that I have more losing trades than winning trades as well as some pretty good drawdowns. Not to mention the times I was a bonehead and pulled my stops.
- And the capper was when I was ready to quit trading all together.
Consistency is something that I'm still striving for. I've always had some good runs, some (too many) flat periods, and drawdown periods. It's tough to answer your question about when I first started trading for a living. During the first six months (May - October 1999) I'd been up about 20%, down 20% and was back to the flatline. I hadn't taken any profits out of the market when I was up. Needless to say I was ready to quit trading and go back to work but just then the market took off. Luckily I was too ignorant to know that the market was going up too fast and I ended up making a killing over the next few months. I had a few weeks in which I made greater than 50%. Thanks to some advice I'd taken from one of Tony Oz's books I'd also started to pull my profits out of my trading account at the end of each week. That banked money is what allowed me too keep trading through 2000 because I took my share of losses and didn't make a dime for the rest of the year once the bubble popped.
What I learned from that first year was how much the market's action impacted my results (duh!) and that money management was critical. Trading with the trend, if indeed there was a trend, was essential. What's helped keep me in the game this long is the ability to recognize when the market was right for my style of trading. Just knowing when to stay out and preserve capital is a major advantage. (Like right now, if you're an intermediate-term trader who only goes long you should probably be on the sidelines.) Much of my frustration with swing trading is how choppy (trendless) the market had become. I was finding more and more reasons to stay on the sidelines. That's not good when you have bills to pay.
So on to your 'addiction'. I'm no psychologist but it seems to me that you're just not comfortable taking losses. The way I see it you have two options:
- One sure way to prevent losses is to stop trading.
- Recognize and accept that trading is nothing but a game of probabilities. You're going to be wrong x% of the time so your goal should be to lose as little as possible on the losing trades.
Assuming you opt for choice two the best thing I can recommend to read and reread (and then read it again!) "Trading in the Zone" by Mark Douglas (or some other book on trader psychology). I read that book a couple of times a year. It does a great job of showing why it's critical to accept the risks of trading. One of my favorite passages from the book is:
If you are unable to trade without the slightest bit of emotional discomfort (specifically, fear), then you have not learned how to accept the risks inherent in trading. This is a big problem, because to whatever degree you haven't accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully.
I'm not quite that robotic -- losing trades don't feel good. But at the same time I know from experience that big losses hurt more much than small losses. You have to get comfortable with the small, acceptable losses.
That book may also help you figure out why you're having trouble keeping your stops. Is it that you're playing with the house's money? Can't stand to be wrong? Have fallen in love with your stocks? Do you simply like pain?
Some additional things that may be helpful:
- Read Dr. Steenbarger's articles and/or books
- Listen to the traders affirmations CD I've written about before. (The CD reinforces much of what's in 'Trading in the Zone')
- Read Van Tharp's 'snowball fight' metaphor (exceprted from 'Trade Your Way to Financial Freedom') which colorfully explains how important it is to keep losses small and to protect your capital.
- Get a coach / psychologist.
- Put a Post-It note on your monitor to remind yourself of how destructive moving/pulling your stops can be.
- Stop trading. :-)
You obviously know what the problem is, the issue is getting the discipline to solve it. Somehow you've got to convince yourself that taking large losses will take you out of the game -- preferably before you learn that by experience.
I think the person asking the question isn't so much as addicted to loss as he is slow to recognize when real value is disappearing. Also perhaps there is a lack of a backup plan, and he feels forced to hold a negative position. I dunno, I just think part of the nature of trading is to be able to get your hands off it once the underlying value is eroded.
Nice post Mike.
I was about to quit several times over in the first year. What kept me going is, what I now recognize to be, a mind trick. I read somewhere that often times, success comes right after you're ready to give up. So it took a few of those :) but eventually I managed to turn the corner.
It's also people such as yourself, and the candid posts, that inspire me to conitnue despite the inevitable difficulties and non-linear progress. Thank you.
Great post Mike.
When I wasn't keeping my stops, I found that it was because I was taking on too much risk. I found myself moving trendlines, and looking for lower support levels. Then the loss would be huge.
What helped me was trading almost exclusively off the dummy setups. I only use hard stops now (thanks Chairman).
By cutting my risk, and using hard stops it has become much easier to take losses.
I also used your excel template for my trading results. When you can see the hard data, that your system has a positive expectancy, losses are much easier to take.
John,
I wholeheartedly agree about keeping a journal and the hard stops. Of course no stop is hard if you can pull it. :-)
:-)
Nice posts by all.
I'll follow these recommendations since I have similiar issues with setting hard stops.
Thank you Mike for the time you took to answer my post. There were some great insights offered and I am starting to take a harder look at how I think about trading...I guess I wasn't really thinking about how to win while lossing. after all this should be run like a business.
On this topic, a good read is the "Phantom of the Pits" which has a lot to say about stops and profit targets. I found that, once I took this advice to heart, I was able to keep a lot more money at the end of the day.
Adrian
I just read "Phantom of the Pits" Last week and was about to post post it hear for others to read. Althought I was some what following the Phantom's rule 1 already I looked back at my trades and realized that if I also used rule two I would have been so much better off today. It's is a good read and a very usefull and simmple concept. It is a good complement to what Mike had to say.
Andrew