Controlling your emotions in the markets.
How to handle bad days in trading
Trading is a roller coaster of emotions. Good, profitable periods make you feel smart and pompous while bad days suck the motivation out of you.
Such emotions are more prominent especially when you are a beginner trader. It’s not only the remorse of losing money in bad days, but also about what follows next when you try to recoup the lost money by trading more aggressively.
Most trading careers end when traders do revenge trading and lose their shirts.
When traders have large drawdowns, they first refuse to cut losses and wish for the markets to give their money back.
When drawdowns reach extremely painful levels, they decide to throw in the towel, sometimes right at the key turning points.
While they are in red, they are so engrossed in despair that they let newer trading opportunities pass by, missing the chance to recoup their money and their confidence back.
So, how should traders deal with bad days and avoid ending their trading careers prematurely?
Here are a few ways to prepare yourself for losses and come out of them like a pro.
Know that trading is non-linear
As many successful traders say, “the first loss in trading is your best loss.” If you lose early on in your trading career, you know what to expect from the market.
You would understand that trading won’t deliver profit all the time and it’s not easy.
I constantly update my trading results in our group to ensure the longer term perspective is always in mind:
Can you see that even though the profit is considerable, it is not linear, periods of drawdown or stagnation are often in the trend.
The prime benefit of this realisation is that you become aware of the perils of trading and safeguarding your capital becomes your primary trading objective. It’s the best thing for your novice to great journey, because great traders always think risk first.
Also, the money in trading is made in spurts and there are times when you should just hide and do nothing. Trying to be a hero in bad markets is a bad strategy. Realizing this early on gives you a great survival edge.
Sometimes you just have to survive and wait for the conditions to improve.
Setting the expectations right is crucial but it won’t move the needle much unless you have a rule book and a plan to deal with whatever the markets are throwing at you. It boils down to timely and disciplined execution.
I have a trading expectation video here for those interested:
A trading rulebook is essential for a long trading career. Your rule book, among other things, will have rules to enter and exit positions, the maximum loss that you will tolerate on a position, position sizing, and most importantly, it will lay out when you will be trading aggressively and when you be in the safeguard mode.
My 15 page rule book (PDF) is available available for all members to use.
Some traders have blanket financial rules to keep them from trading if their account drawdown reaches a certain level. They stop altogether and nibble only when the conditions start improving.
Do post analysis
Post analysis of trades is easy when you are on a winning streak but quite painful when profits are elusive, and losses are mounting. Nobody wants to face the bad side of trading and post-analysis shows it to you right on your face.
In our members area I log and share all my historical trades.
The best thing to do in trading is to learn from other people’s mistakes. The second-best thing is to learn from your own mistakes. Traders who fail to do either, quit trading.
In post analysis, traders can pinpoint and note their mistakes and swear to not make them again. With each successive post-analysis, you keep on eliminating your trading mistakes one after another.
When you do this for some time, you significantly reduce the number of errors that you can make. When you eliminate the major ones, you cut your downside significantly and expose yourself to unlimited upside.
Reduce position size
When you are on a losing streak, the worst thing you can do is doubling up on your position size or even worse, getting on leverage.
Good traders lighten their exposure when things are not working for them. They keep on reducing until markets are conducive for more risk taking. This is this exact approach I take.
Test waters with low exposure to see if you think markets are turning. Worst case, your stop losses get hit, but the stakes weren’t too high, so you are relatively safe. If your smaller trades start working, you can increase your exposure progressively.
I do this by using a form of Kelly Criterion staking, when trades are winning the positions size increases and when they are losing they are reduced. Additionally I reduce the portfolio size (holdings) due to less qualifiers.
Take low-risk trades
When the markets knock you off, you must take trades that are less risky. For example, if you have got two potential trades with 9% and 5% stop loss, take the 5% stop loss trade.
Smaller losses on smaller positions will not drain you as much mentally.
The maximum drawback of this approach is you end up taking a marginal loss. But that’s the cost of doing business in trading. You are feeding the smaller fishes to catch a big one when it comes ashore.
Take a break and let the markets settle
If you have been badly hit by markets, it’s best to take some time off. Let the markets be for some time and rejuvenate yourself. You can come back after a week or two to do your post analysis and start again.
While you are on that vacation, be inspired by the best traders you follow. Read about them, their stories, their successes, and their failures.
Take the setback as a challenge to get back in and make incremental changes to your trading strategy and psychology to bigger success.
The final word
Trading losses are the reason most traders never reach the heights they always desired. One loss or a losing streak is not the end of the world. Many successful traders lost money before they made it big. If they did it, you can too.
Giving up is easy and unworthy. What makes the difference is marching on. Remember that you are at the same fork of the road that everyone ultimately faces. If you quit, you are just another trader who never made it. If you recommit, persist, and work for it, the probability of you succeeding in trading or anything else increases immensely.
The competition further up is quite low as tenacity is a rare quality. So, go back to your “why” and recommit.
If you are not a member already why not join below where like minded individuals, including myself, can help you through the journey.
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