Search the Community

How Traders Rebound From Losses I firmly believe that what truly separates the 10% of winning traders from the 90% that lose is the trader’s mindset. The vast majority of traders think they want to trade until the losses hit them over and over and they just can’t mentally and emotionally handle it and end up quitting entirely. I believe the following ten principles separate the quitters from the winners in the stock market. How Winning Traders Rebound, make a Come Back, and Never Quit They accept losing trades quickly but it does not define them, they learn and try again. The next trade will be more wise than the last one. They compartmentalize emotions by not blaming themselves but understanding the historical expectancy of their systems returns. They have a bias toward action by constantly doing things that move them closer to their goal of being a rich trader. (Homework, chart study, reading, being mentored, back testing, etc. ) They change their minds sometimes, they know when to stop doing something that does not work and move in the direction of trading success through new lessons. They learn what type of trading is right for them. They prepare for things to go wrong through risk management and position sizing instead of just going naively toward their goals they are ready to make adjustments as needed. They’re comfortable with discomfort, they will accept losses and draw downs in their method, they are willing to pay tuition to the markets to get to where they want to be. They’re willing to wait, they patiently improve each day setting themselves up for those winning trades that will be very profitable in the future. They have trading heroes that inspire them to be better than they are now and give them the hope of achieving their dreams. They have more than passion they are on a mission, their desire for success gives them the drive to not quit until they win. They know only time separates them from their goals of success in the markets. 20 Mental Trading Edges #1 goal is capital protection Focus on following a process Rarely committing trading errors Discipline Focus Trading with the predominant trend instead of your opinion Using entry and exit signals instead of emotions The goal is trading with discipline not trying to make money in every trade No regrets on a trade that followed your plan Patience Look at charts of the next highest timeframe Trade for capital appreciation not to pay monthly bills Trading your own capital Having realistic trading return expectations Previous trade, irrespective of profit or loss has no influence on next trade – (Srinath Madas) Trading with a position size that keeps your emotions out of your process Living a healthy lifestyle Living a balanced life You know that you are the weakest link in the trading process “Tons and tons of evidence that the models work over time as long as risk management criteria is adhered to.” – Richard Weissman The Education of a Trader Trading Losses: There are two types of losses, one loss is caused by the market simply not being conducive to the profitability of your system. The other type of loss is caused by a lack of discipline, causing you not to follow your trading plan, system, or position sizing. Experiencing a loss while following your trading plan is to be expected. If you are trading a proven and tested method, then you have learned that taking a loss is simply part of trading. However, if your breach of discipline caused your loss, whether not taking a stop, over riding your plan, not taking an entry, or trading too big, then it is time to learn why you failed. Ego? Fear? Greed? Overconfidence? Laziness? It is crucial that you understand your shortcomings, so you do not repeat the same mistake again. If you don’t have a quantified methodology then everything you do is a mistake. A Mentor: Getting a mentor is a great learning shortcut. Having someone available to ask questions of, and get direct feedback from, is incredibly valuable and short cut the learning process. The hard part is finding the right mentors. If you are paying for a service then you need to verify the mentors credentials and success as a trader and coach. If a successful or rich trader agrees to help you with no compensation, it is crucial to respect their time. Have questions ready and ask good questions by doing the necessary homework. It is also possible to pick legendary traders and study them in depth through the internet, interviews they have done, books they have written, and purchasing any services they offer. Trading Books: Books that are written by researchers and successful traders are a gold mine of information that can speed up the learning process for new traders. When looking for the best trading books, I use Amazon and focus on books that are written by traders that have successful track records or best selling trading authors that have studied trend followers and Market Wizards. I also like to see many 4 and 5 star reviews for the trading book. 10 Things Hard About Trading It is hard not to trade too big when you really believe in a trade entry. It is even harder to take a big loss if it goes against you. It is hard to keep taking your entry signals during a losing streak. It is also hard to miss a signal and watch it go on to be a big winner. It is hard not to add to a losing trade when the price keeps looking better as it falls lower and lower. It is hard to be on the wrong side of a trend. It is hard to buy a breakout in trend because it looks too high. It is hard to miss out on the beginning of a big uptrend. It is hard to cut a loss early with the ego wanting to be right about the trade. It is hard to let a winning trade run when you would prefer a quick gain than a bigger long term gain. It is hard to buy when everyone is fearful and hard to sell short when everyone is greedy. It is hard to trade through different types of markets, bull markets, bear markets, volatile, trending, and range bound because the rules keep changing. It is hard to convince your friends and family that there is a process to your trading and that you are not a degenerate gambler. It is hard to ever quit trading after you have tasted how sweet a big winning streak is and how life changing it can be. My Take On Trading If you’re too proud of your trade idea it may be a bad one. If you can’t trade with controlled emotion the position size is probably too big. If the trade is going to stress you out and mess up the quality of your life it is probably not a good trade. If you don’t know why your in a trade how do you know when to get out of it? If you need to hide your trading results from your family then you may have a problem. Your family should be the reason that you are trading not an interruption when you’re trading. By the time everyone agrees with your trade you may be on the wrong side of the market. Don’t start bad trading habits that will cost you money in the long term. Always try to be a better trader today than you were yesterday. In trading you have to focus on the long term results not the short term annoyances and frustrations. Trading is a professional endeavor like any other and you can only get out what you put into it. The Most Important Element of Trading I had a recent poll online where I asked traders: “What is the most important element for profitability in your trading?” They had four options. Was it entries? No, entries are not were money is made, it is in the exit with profits (13% votes). So exits are the most crucial? No, size of wins and size of losses will determine profitability not just exits (13% votes). So, it’s position sizing? Trade size can make you or break you as a trader but is still just one element and part of the big process (17% votes). What was the winner with 57% of the votes? Discipline, this is the most important element of trading. If you don’t have the discipline to take your entries, take your exits, and position size right then they do not matter. There are many ways to make money in the stock market, value investing, growth investing, CAN SLIM, day trading, swing trading, trend following, and even buy and hold investing but without the discipline to do the work to develop your own system and follow your own trading plan, no system will make you money. Discipline is one thing all successful traders share.

Winning Trades are the by-product of Losing Trades Too many traders have an obsession with Winning Trades. I hate to be the bearer of bad news to some of you, but taking losses is the primary job description of a market speculator. If Losing Trades offend you or upset your emotional chemistry, if you consider “being wrong” to be a character fault or a “problem” with your trading approach, if you even think that the marketplace cares what you think or what you do, then market speculation is probably not for you. Trading is mostly an exercise of throwing mud against the wall to see what sticks – and most lumps of mud fall quickly to the floor. I have known many extremely profitable career traders over the years and very few of them have a win rate in excess of 50%. Almost to a person, these traders view taking losses (many losses) as the process of finding winners. I am not offended by being wrong on a market call – it is absolutely not a big deal to me. It is always an amusement to me when tweeters go out of their way to remind me of bad market calls. To be a successful profit taker, a trader must first become good at taking losses. Sorry – both profits and losses are part of trading. I know of no other service similar to the Factor that provides a frank discussion of losing trades, losing days, losing weeks, losing months and even losing years (I have experienced several net losing years along the way). I am in no way embarrassed to be wrong on my market analysis or on trades. If Losing Trades and being wrong bothers you then trading is not for you. If you become obsessed with Winning Trades and making money back in the same stock, forex pair or futures contract in which you lost capital, then you need to seriously examine if you should be involved in market speculation. Risk Management Money management is job #1 for a trader. Keeping your pile of chips intact is the only thing that really matters at the end of the day. (Risk Management) If you think you know what a given market is going to do, you are only fooling yourself. Trading a market with expanded volatility but reduced liquidity is a demonstration of arrogant insanity. Being flat is a position. An obsession to always be in the market will lead to disaster – it is only a question of when. Being short volatility (short gamma) is akin to picking up pennies in front of a steam roller. Of what value is market analysis and trade selection once a trader has lost his or her trading capital. Patience … Discipline … Discipline … Discipline … Patience I know my sweet spot. Every trader should strive to know his or her sweet spot. We should strive to only take a trade when the market set up is in our sweet spot. We should strive to avoid trades out of our sweet spot. If you, as a trader, do not know your trade set up with great intimacy, then how in the world will you know if you are exercising patience and discipline? Once you know exactly what your sweet spot is and is not, then the real challenges begin. The real challenges for me (and it could be different for you) are different nuances of patience and discipline. Patience to wait for just the right set up Discipline to sit on the sidelines and not getting pulled into a trade that does not fully satisfy my requirements Discipline to pull the trigger when the right trade comes along Discipline to remain detached from open positions and properly manage each trade according to trade management guidelines developed over decades of market speculation Patience to allow a position with a substantial profit potential the room and time to bear full fruit The above challenges are very, very real. The markets can force a trader to let his or her guard down. The markets are all about forcing traders to make mistakes. Markets are constantly luring traders with such deceptive messages as: “Trade now and trade often” “You’re missing out on some good moves” “The only way to make money is to trade” In fact, there are times when NOT trading can be the action with the best outcome. Trading just to trade often leads to drawdowns. Then comes the urge to find trades in order to recover the drawdown. Often this leads to a worse drawdown. Before a trader knows it he or she can be in a 20% to 30% or greater drawdown resulting from trades that never really qualified as trades in the first place. This is when the capital drawdown becomes a significant emotional drawdown. Vicious cycles can easily come upon us as traders. Trading Drawdowns Traders talk a lot about Trading Drawdowns. But what are they exactly? How are they measured? What do they mean? Can they be prevented? If not, how does a trader deal with them. In the world of futures and forex, Trading drawdowns are measured based on month-end to month-end net asset value (or nominal account value). I know a number of traders who will measure drawdowns on a week-ending basis. I really do not know many traders who measure drawdown levels on a day to day basis. I was clipped today by about 170 basis points (1.7%), but that is not a drawdown. Day to day asset volatility does not represent a drawdown. It is especially dangerous (from an emotional perspective) for novice traders to be intraday equity watchers. This is NOT a habit you want to get yourself into. As a chartist, I want to trade the charts, not my equity level. I do not want intraday — or even day to day — volatility in equity balance to affect my judgement. I know traders who have “circuit breakers.” whereby if they reach a certain daily loss level they liquidate all positions. For me, a daily loss of 3% or more would force some examination of my positions. But, the chances are great that a daily loss of 3% of capital or more is an indication of being over leveraged, and that is a separate (but more deadly) issue. Drawdowns are a fact of life for a trader. They happen. There will be bad days and bad weeks and bad months, and periodically even a bad year. A losing day/week/month is not an indictment against a trading plan. In fact, drawdowns are to be expected and a trader must learn to take them in stride without pulling the escape hatch whenever a position turns into a daily loser. A benchmark metric maintained by many professional traders is their Calmar ratio. The Calmar ratio is calculated by dividing the worst drawdown (month-ending basis) into the average annual rate of return for some measure of time. A rolling three-year period is the most frequent time measure for determining Calmar. A Calmar ratio of 2.0 is considered outstanding — 3.0 is world class. Some short gamma traders (naked options sellers) can generate Calmar ratios of 5.0 or even higher — that is, until they go broke, which they eventually will. The practical implication of a Calmar ratio of 2.0 is that to achieve an average annual ROR of 30% you will likely experience a worst-drawdown of 15% or greater (month-ending). Keep in mind that a month-ending worst drawdown of 15% probably equates to a week-ending worst drawdown of 20% or greater. Now, if your trading approach frequently experiences daily equity swings of 3% or more, then you have some issues that need to be dealt with. But, equity swings less than 2% daily (or 5% monthly) must be expected. If you cannot handle Trading Drawdowns, then my advice to you is simple — quit trading and take up gardening or knitting. Related articles:Can you double your account every six months?Why Retail Investors Lose Money In The Stock MarketAre You Ready For The Learning Curve?Are You EMOTIONALLY Ready To Lose? Trading Insights From Steve Burns Want to learn how to trade successfully while reducing the risk? Start Your Free Trial