Michelle B submits: A daytrader I knew who had a very high-percentage win rate, around ninety-five percent, when faced with a loss, would let it run. He was capitalized enough to do what he called “pouring on the gasoline.” This activity of his would involve “lining up cans of gasoline as far as the eye could see.” What he would do was to buy furiously all the way down at various support levels to reduce his cost basis. Sometimes, this took days, even weeks. Most of the time, after tying up his buying power and only focusing on his special kind of arson while missing many other opportunities, he would be able to get out with a small loss–the amount he could have booked in the first place. Every once in awhile, his account would get burned by his own arson. Because of his high win rate and trading skill, he would make up the losses fairly soon. Eventually, he would be faced with a loss, and he would turn arsonist once again.
He knew what he was doing was contrary to everything he knew about trading discipline. He referred to this crazy reaction being done by the ‘nut within’. At the same time, I was also doing battle with myself. Taking my clue from him, I went a step further, and identified my ‘nuts within’. I had three of them! The one that wanted to control every tick in the market. The one that had to be immediately gratified by the market. Last but least, the one that lived only to be entertained by the market. These ‘nuts’ managed my trading turret. Every once in awhile, the sane trader would make an appearance and trade well, but not for long. The ‘nuts’ were too potent and too numerous.
I then recalled a book that I read a long time ago, called, Taming your Gremlin, written by Rich Carson. I no longer had a copy, but I remembered one aspect of the approach to dealing with self-sabotage. That aspect was to identify the gremlin, to be conscious of its existence, while not trying to banish it. If you try to stop your nonsense all at once, it won’t work. Maybe for awhile, you will trade like a sane person, but then the self-sabotage will appear once again.
I remember the British singer, Marianne Faithfull, when asked why she almost destroyed herself through drug addiction, responding the why did not matter, only that she knew she could stop taking drugs. Do not reason with yourself, nor scold yourself, or go into deep analysis why you trade like an idiot at times, just identify the kind of sabotage you do. Shine the light of recognition on the beast–chase that thing from the shadows. Don’t yell at it, don’t try to destroy it, just know it is there and see it in all its beastliness. Its power lies in it being secret, hidden, and vaque. Name it by name.
Gremlins scuttle back to their hiding places when exposed to light. They don’t mind popping out into the light of your consciousness disguised as the greatest trader ever known and make you trade like a jerk. But, that is their choice. However, they have no tolerance when you decide to shine the light on them. They don’t appreciate that. After awhile, they just don’t bother to come out. If they do manage to come out, they don’t stay long. But, they are always there, they never go away. You have just tamed them, so you can function in a positive manner.
Of all of my gremlins, the control freak was the hardest and took the longest to tame. However, if it does appears now, and says, do not honor your stop loss because you have planned the trade PERFECTLY, you have researched EVERYTHING to ensure the trade will work, so if it does not work, just IGNORE that fact, my response is laughter. I know I cannot structure the market, I can only structure my interaction with it, and that my trading plan just has a probability of working. The control freak scuttles back under its rock, and the stop loss stays.
When the gremlin which wants to be immediately gratified pokes its head out, and insists I book a profit earlier than my target, I review the reasons why I have decided on such a target, and if the reasons are still there, the trade stays on, and that gremlin slinks away.
The silly gremlin which thinks the market is a show, and want to get its kicks from being entertained in exciting ways, still visits, and screams in its frenzied voice, hey, why don’t you jump aboard that hot stock to just see how far it goes? I check out the support and resistance on various timeframes, and if I cannot perceive an opportunity, I decline the urge to trade without an edge. That gremlin slithers away also.
Depending on the ferocity and different kinds of self-sabotage, it can take quite awhile to tame these inner beasts. At first, the self-saboteur will hate what you are doing, and will raise a fuss, making the gremlin appear stronger and even more powerful. Don’t argue with the beast, just keep shining the light of recognition upon it, enabling you, the trader, with your knowledge and skill to rise to the occasion and manage your trading turret.
Great post, Michelle. I do the same thing as the trader in your story. I used to hold losers for months. Now I try to get out of losing positions in a day or two. And I think a lot harder than before when I decide to hold on to losers for more than a day.
z, thanks. Keep on recognizing what you do that is contrary to your trading plan. Slowly and surely you will get a handle on your breach(s) of your trading discipline. Your confidence in your ability to adhere to your risk management and trading plan will grow, and being disciplined will get easier and easier. You will also be able to let the market teach you how to trade better, to make better, improved trading plans, if you are not obsessing over trades that became ‘investments’. Once you get on the virtuous circle of your making, it goes around and around more smoothly as time goes on.
I REALLY needed to read a post like this today. I have been struggling with my Gremlin(s) all month! I’ve done pretty well with the stock selections and entry levels; however, I’ve completely bungled all the exits.
In other words, October has been a month of cutting profits short (on the long side) and letting losses run (on the short side)
October may not prove to be the worst month for the markets this year, but it certainly has proven to be the worst month for my portfolio \:d/
–GA
a long-term investor learning how to trade short-term.
Gunwalls, Congrats on the recognition of what you did well, that is, stock selections and entry levels and on the recognition of what you did not do well, the exits. Read, starting at this site, info concerning exits, stop losses, risk parameters, R-multiples.
Since you are practically learning a new language switching from long-term investing to short-term, go nice and slow, focus on growing a new set of skills, let the market teach you, but control the losses so you got some capital with which to learn.
Thank you, Michelle, from a new kid on the block. Today I forced myself to close out a trade after watching its near disaster for three days, and beating myself all the while. O.K. The trade is closed, the lesson (very expensive) planted in my mind and on to more clever trading and gains.
What is funny is that before I started trading, I thought how foolish people were who made errors like that, it was so un-smart intellectually that clearly I would not fall into this type of trap. Well, humble pie for dinner tonight and thanks to you for your much appreciated efforts for us all.
Michelle,
Thank you for the great post. I just faced a problem that I seems like to repeat my same trading mistake again and again. I tried to overcome it consciously, paste a post on my monitor, it might work for 2 to 3 days but then it came back again. Hope “taming the gremlin” can help me to overcome it.
zbs
BBC, yes, you now know from first hand experience how hard it is to honor stop losses.
I regard the stocks I trade as merchandise. If it becomes obvious that I can only sell the merchandise at the defined loss I planned on risking when I bought it in the first place, then I get rid of it. I do not want old, stale merchandise sitting around, I am willing to sell it at a discount to what I bought. Any trade has only a probability of working, just like any sale of merchandise in the ‘real’ world has a probability of getting sold at the price that the seller wants.
I think that the reason why stop losses are hard to honor for many beginning traders, is that they actually do not have a risk management. If that is the case, read everything you can find, starting at this site, about risk management. Since any trade just has a probability of being profitable, a defined loss prior to placing the trade is necessary.
zbs, recognizing trading discipline breaches is different from battling the self-saboteur, an extremely fine line to draw. If in your consciously focused efforts to keep to your trading plan involves your saying stuff like, you complete and utter idiot, what were you thinking fool, I will never do that again, then you are battling with yourself.
However, if you say stuff like, I had no defined loss before I traded, no wonder I did not honor it, I pulled my stop because I cannot accept a loss, I booked my profit earlier because I did not like how the price action was behaving, then you are focusing on aspects that will tame the gremlin and strengthen the development of a skilled trader.
Great post (again) Michelle.
This comment is slightly off-topic, but related to a recent post of yours about trading rules and discipline. Anyhow, someone posted their 1 rule list of rules, which was:
Do I have an edge on this trade?
For me, this has been a great lesson
because if you are following your plan, then you (presumably) do have an edge. But if you are entering a trade for any other reason (to get some action, because you “think” a hot stock will keep going up, etc…) then you DO NOT have any edge and you are not following your plan.
If you just ask yourself that one question before entering a trade you force yourself to confront the facts of the trade: either you have an edge and you should put the trade on, or you don’t and you are about to do something dumb.
Great rule! And maybe one that can help beat back the “action” gremlin.
here’ss a worthwhile read for newcomers, Buffy on stops and exists
I think she is right in that how to deal with losing trades is the most personal element of anyones trading appraoch.
like the guy in the story, i used to be a fan of “trade managment”, thinking, that all i need was the craft and skill to hit home all the losing trades…ironically, once you get tired of this, you realize, that stops are a gift…:d
Brad, I agree about asking yourself if there is an edge before you take a trade. Because if the answer is no, you can then ask, how can I find an edge? Watching this particular stock’s price action and volume can possibly teach you how to. Why did the price action and volume tell you when it was a buyable dip or not, and what did it tell you about the target it decided to reach? Asking that question will slow you down, and give the market an opportunity to teach who how to perceive an edge.
Hours of watching price action via streaming charts of the momentum stocks, whether up or down, each day, is work, and yet beginning traders focus just on actually trading, because they believe that is their work.
After you have done enough work, you can actually apply what you know, in a trade or two, strictly following risk management. Before the trade you ask, do I have an edge, and this time you will say yes, and take the trade. But as important as the yes answer is to do you have an edge, is your managing your edgeful trade because it is just a probability that it will work, regardless of the perceived edge.
Excellent post. The hardest thing we have to do as traders is make a decision and it is amazing that after a lifetime of making decisions that it is still so damn difficult. I have recently started process trading (inventing and following processes was what I did when I was an engineer) and I seem to be doing better. I have had a difficult time understanding that just because I am having fun what I am doing is actually work and it better be treated as such. While following a process makes it seem mechanical in nature a lot of the decisions are removed all you have to manage then is the risk and in this business as in all businesses risk is about the only thing you can really manage and come out ahead.
Peter, great comment regarding “trade management” rather than risk management.
The virtuous circle of which I often speak, only works if it is tailor made, to fit your personality, risk profile, and capital base. Dr. Brett Steenbarger recently commented how important it is to fit a trading approach to your personality.
John, the context within which traders make decisions is very different in kind from the context within which people make decisions in the course of their regular jobs or routines. Mark Douglas in The Disciplined Trader focuses how this enormous difference is what trips up so many traders. They think just because they are disciplined in their jobs, they can just transfer the same to trading. The skill set that works in the world of regular jobs fails miserably in the world of trading.
It sounds like you got the start of a virtuous circle going.
I recently picked up a copy of Dr. Brett Steenbarger’s book “The Psychology of Trading”. You post falls in line with one of the chapters I’ve read thus far.
The premise (hopefully Dr. Steenbarger will pardon my poor summary) was that we have multiple facets to our personality. At different times different facets dominate. Sometimes the different facets have conflicting goals, so we find ‘ourselves’ fighting against ‘ourselves’. For instance, one facet may be focused on financial gain while another may need excitement, but they both have access to your trading account!
By stepping back and becoming what he refers to as the ‘internal observer’, we can determine what facet of our personality is currently dominate. This simple act of introspection tends to put one in a more objective mind state.
Learning to recognize our own behavioral patterns and to moderate our more impulsive facets is required for success not only in trading but in life.
mikeb, thanks for the summary. The internal observer is someone to cultivate. I think that trading does cultivate it. You either run out of time, money, or motivation, or you stick with it because you have developed a strong internal observer. So both the trader and the internal observer get developed together.
From observing people around me, I have concluded that people who do not develop an internal observer, often settle into a niche where they just follow what is deemed the status quo, and as long as they are functioning within their niche they are ok, but take them out of it, and they will experience tremendous discomfort.
I also have observed others who have such little conflict within, that they seemed to have been born with a well developed internal observer in place! If you can find someone like that, hang out with them, and observe how wonderful it is to function without conflict!
Great post! I just wanted to point out how funny I think it is that the footer invites the reader to read other TraderMike.net articles about Marianne Faithful, and how horrified I’d have been if the search turned up dozens of them!
Richard, I am working on it, give me time, there soon will be enough references to M. Faithful to make Mike’s refs to R multiples seem limp!
(Yes, I am joking!)
Tame the beast with knowledge that foreshadows your odds of success with a trade. Knowledge obtained from tools, hard knocks, trading plan – anywhere will also tame the beast. Just as you would rightly name the gremlin to shine a spot light on it, so should you also shine a light on clear hard facts about the trade you are about to take. Is this a valid observation tagged with an obvious plug at the end? Only if you read more about what The Odds Maker can do for you 8-| – Put the Odds in your favor Guards!!
So very shameless David!
David, untamed beasts won’t even let the trader near any productive tools that could result in improving trading skills. Once the beasts rule the turret, it is the number one priority to tame ‘em so the trader can decide what the market is telling him what he needs to learn and do (including perhaps focusing on new tools, indicators) in order to improve his trading skills and thus his edge.
But, anyway plug merrily along and, LONG LIVE THE ENTREPENEUR SPIRIT!