Trading Psychology -- Consecutive Losses and the Trading Psychology Spiral
By Barry Lutz of Tactical Trading, LLC*
Posted: Jun 23, 2006
You go long, and the market immediately goes down; you go short, and the market immediately goes up. That's 2 consecutive losses, and you are getting a little “anxious”, so you don't take the “next” trade. Of course, this trade is a winner. Now, to make the situation worse, you then “chase” the move, and, as soon as you enter the trade, it immediately reverses, thus giving you another loss. This is now 3 in a row. Okay. One more “try” -- this can't happen on every trade can it?
This time, though, you’ll be really clever. You have noticed that the market is in a range, and it's the bounce from the low / retrace from the high that is causing all the problems. So, this time, the next trade you take will be a range extreme fade and the heck with your trading method!
The market is at the range low, and, per your new “on-the-fly” trading plan, you go long. Instead of bouncing again, the range immediately breaks out to the downside. Not only does this give you consecutive loser 4, but the loss occurs as a result of your trading against one of your “best” method trade setups and becomes a trade that is giving enough profit to pay for the previous 3 losers and make you net ahead.
Now what are you supposed to do -- QUIT? AND, to be sure that there is no more temptation -- you throw your computer out the window and dive out right behind it. You are in a trading psychology spiral.
What Is a Trading Psychology Spiral?
I think of a trading psychology spiral as the transition from trading losses you’ve accepted both as a part of your trading method and as something inevitable in trading to a surge of emotions that continually builds to a point where you can no longer accept anything. As this eventually goes out of control -- trading method is completely ignored and replaced by emotional responses and decisions for everything you do. Even if quitting were really the only viable thing to do at the time, the trading psychology spiral can cause an emotional response where you don’t even consider it -- until the situation becomes so desperate, the trader can’t take it any longer AND he or she does have to quit.
This isn’t a discussion about emotions and trading and the various fears and issues that keep a trader from trading to begin with; as we know, emotions are an inherent part of trading -- you learn to control them OR you can’t trade. Instead, this is a discussion about emotions that are typically controlled well enough so that you “can” trade, but, then, something happens where the trader loses that control, and emotions spiral. A series of consecutive losing trades, especially those caused by deviating from the trading plan, are a root cause for this happening.
This also isn’t about something that happens only to inexperienced and unprofitable traders. There are going to be those times where nothing a trader does will work, and that result is going to be a series of consecutive losers. So, the situation is the same; it’s the reaction that may be different. For instance, Trader A may go into a panic, causing him or her to spiral out of control and lose all self-confidence and self-trust, and ultimately more money than was intended.
On the other hand, Trader B may go into a period of revenge trading, coupled with an increase in trading size because he or she is “sure” that each next trade is going to bring him or her back to even. Also, a spiral out of control, and the losses continue – AND, also, a loss of more money than was intended. WHAT does Trader C do?
Controlling the Trading Psychology SpiralConsider this: Each time a psych spiral occurs, AND you go out of control -- the quicker the next spiral is going to occur, and the faster you will go out of control when it happens. This is going to continue until trading becomes too painful, and you will not be willing to trade any longer.
Consider this: It is better to work through the emotions instead of quitting. Quitting is too easy and provides no solution or aid in preventing this from happening again. It also intensifies the effects of a rough period. As well, you have lost the ability to “count” on yourself when you need most need to. To control a psych spiral, before you go out of control, is a tremendous win in and of itself. Do this, and get your trading back on track, and you will have made gains the value of which you can't imagine. You’ll know that you may have losing periods, BUT you’ll be able to trust yourself to remain in control and not magnify the damage.
In light of this, take what you believe to be your key trading issues, write them on an index card and stick them on your computer monitor. The objective is realization and awareness, thus making these issues available to your conscious mind as a reminder, rather than having them available only to your subconscious as a source of the problem. As you make your notes, BE SURE you’re writing short non-judgmental notes -- DON'T let the “solution” make the “problem” worse.
For instance, consider the build of emotions coming from consecutive losses that are also occurring during congestion -- write notes similar to these on your card: A build in emotions may come from a series of quick consecutive losses. Quick consecutive losses often come from trading inside of congestion. Are your losses “base” congestion method trades, OR are you overtrading? There’s nothing wrong with “base” method trade loses. Therefore, your trading results are fine when you “base” method trade.
Now, consider the same situation, BUT with different notes: Don't be an idiot and overtrade congestion the way you always do. You are going end up with another losing day like usual. You make the same mistakes everyday, and the same thing happens. You have no reason to even trade if this is all you are going to do.
Remain Neutral
Remain neutral -- another note for your index cards.
Another approach might be to write notes that include the things you can remember yourself doing or feeling as you transition from acceptable emotion to psych spiraling. For instance: Shortness of breath -- sweating -- squirming in your chair -- inability to sit down. AND, as the spiraling becomes more intense: Cussing -- screaming -- throwing things -- breaking things. AND, when the spiraling is out of control: Panic -- desperation. Clearly, there is a whole list of physical responses to uncomfortable emotional situations; being aware of them as they occur may be a step in controlling them before they “take over” and lead to spiraling.
Be Aware
I want to know the potential for the spiraling situation. It is VERY important to acknowledge that you have emotions and not try to ignore them or hide from them as a solution to the problem OR because you perceive them to be a sign of weakness. This will just actually make the situation worse. You are human -- humans have emotions -- emotions become more intense in more difficult situations. So, I don't need to know how I am going to have responded as I go out of control. I do need to know, and have something to remember, and / or think about, that can keep this from happening that can keep me as neutral as possible, in what would be the more difficult trading periods -- something that will “push” me back to method AND “away” from psych.
What Does Trader C Do?
Trader C is the one who remains the most neutral in winning and losing -- the most neutral in all situations. It's this neutrality that becomes essential in keeping the emotions from becoming a trading psychology spiral because the trader can “accurately” evaluate his or her losses in terms of method. This trader will only trade his or her most “base” method setups after any difficult period, AND, IF these lose, so be it: That possibility has already been accepted. Go on to the next method trade -- it will probably be a winner.
*Reprinted (and modified) with permission from Barry Lutz of Tactical Trading, LLC (www.tactrade.com)
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