Saturday, March 28, 2009

ADD-ON TO MY FIRST ARTICLE ON TRADING PSYCHOLOGY

Apparently, the "handcuff" idea is catching on like wildfire. I'm getting e-mails from random people, tweets from all over and all sorts of shit from people from everywhere. If you haven't read the article on the 4 Stages of Learning, you should.

I'm not joking. People are actually doing it, but they don't know when it's appropriate to do so. If a trade is going against you, that does not automatically mean handcuff yourself (or walk away from the computer). You have to do it under the right circumstances, or you will suffer substantial losses for no good reason. You will subject yourself to unnecessary, avoidable, and unforgiving pain.

What are these "right" circumstances? Here they are (I didn't think people would actually be doing this, so I have to write this article to put out a warning):

1) The trade must be working the moment you put it on. If a trade goes against you immediately, then your timing was off. Re-evaluate the situation. If you have to close the position, then close it and re-enter on a better set up, long or short.

2) The trade must be a swing trade. My "handcuff strategy", if you want to call it that, cannot be used for day trades. The buffer just isn't there. And, when I say handcuffing, I'm talking about walking away from the computer as well. After the trade is working, then the handcuffing prevents you from prematurely walking away from a trending trade.

3) I don't want to call it a strategy, so I'll just call it a disciplinary method. This method works when you take advantage of a trend, and helps you withstand countertrend reactionary rallies. Everyone hates seeing paper profits disappear, but if the technical trend is intact, then you need to take the pain to realize the gain that comes after it.

4) It is highly likely that if you "fail and fold", then you would be doing so immediately before your gains are realized. It's not a mystery that sometimes the moment you sell or cover, the trend reverses back in your favor. The trend changes under the maximum pain threshold.

5) I do not encourage handcuffing yourself to a metal pipe, or in real-life examples e-mailed to me: your bedpost, your table, your bookcase, your doorknob, lock yourself in the closet, etc. How is it possible to do some of these things? Did you cut a hole in one of the bookshelves? Goodlord. I suggest walking away from the computer with a stop loss set in place due to the extreme dynamics of the market's volatility and MUI - market under the influence (of news).

6) Make sure the set up is right. If the set up is right, then #1 is taken care of, and you don't have to read the rest of this. If it is an impulse trade without a proper entry or exit plan, then you deserve a large loss. Don't think that the market is your friend and she'll just give you money whenever you want it. Trust yourself, not the market, not any one else.

Let me tell you something. I only administer the handcuffs under the most appropriate and dire circumstances. Yes, my methods are extreme and unconventional, but under the most dire circumstances where a person cannot control his behavior on his own, then there must be intervention. We all have habits, some people have really weird ones, but we all have habits and we all know how hard they are to break.

Psychologically, I believe that trading is the most difficult profession in the world. Trading goes against every natural human emotion. Oh, how difficult it is to remain unbiased and neutral when on a winning streak and to hold fear, anger, and sadness at the gates during a losing streak. I know it's tough, and we've all been there. You may be there right now. Let me offer you a story.

6 years ago when I was 18, I remember losing over $10,000 (don't know the exact amount) in a stock I can't remember. It was a stupid mistake and I don't remember what mistake I made from the long list of mistakes I made, but it was big. Maybe I just blanked it out because the pain was too great. It was the worst day of my life (at that time). I became reckless, tried to drink everyday, didn't want to see any friends, and it affected my school work at the military academy that first semester.

Lucky for me, the discipline and other virtues I picked up there along the way strengthened me and allowed me to continue on. I was at the 'make it or break it' stage where you either continue on or quit. If I did not go there, I think I would have quit, honestly. The money was a big deal, but the psychological damage was extremely devastating. The experience still leaves chills in me and I have to pause as I write because the effects have been so great on me. I don't remember the stock or the price, but I will never forget how I felt.

It seemed like I changed into another person. I was devastated. Now that I think about it, I fell into the death spiral. It was a hellish nightmare. I hated myself for being so stupid. How could this have happened to me? Well, it's simple. I was human. I did the humanly thing and I made every mistake that traders made. I don't produce double-digit monthly gains (on most months) because I'm "good". I came from a road full of disappointment, regret, and losses, and that paved the way for me to improve myself. I made the choice to become a professional trader long before I became one.

I was talking to a friend one day and he thought I never lost any money and was full of shit. Fucking wrong son. I lose money all the time. You can't make money without losing money in this business. You will never win 100% of the time. You will lose. Accept it. If you hate losing, then you should quit trading immediately. Sorry, but it's not for you. I learned to embrace my losses. I view it as Ms. Market warning me that I'm doing something wrong. If I don't follow what she says, then I will be disciplined with God knows what.

Ms. Market loves to give you warnings, but she also helps you out and gives you hints. These "hints" are the high probability trading set ups you should be looking for. She's trying to give you some free money. Are you listening to her or are you distracted by something else? We want to accept her gifts, but sometimes our emotions get in the way. We may not see the hints, or we may be afraid to take action.

Take the losses early on and learn from them. I like the whole blog idea or keeping a trading journal because it allows you to document what happens in the market and in yourself every day. If you don't keep any record of some sort, then you are guaranteed to make the same mistakes over and over again. Keep a journal or writing in a blog should part of every trader's after-hours review process.

The turning point came when I overcame a very disappointing beginning. I made it a goal to improve myself. People find it a surprise that I read over 100 books a year, but it's not a surprise. Sometimes fear can come in handy. I feared the worst, which was a total wipeout and probably quitting. Improving yourself slowly bridges the gap between making trading a hobby vs. making trading a professional career and a business. It's a process that develops over many years.

The rest is history. I went on to kill the market every year after that, producing triple-digit gains for the past 3 years. Once you have a strong foundation, the market cannot stop you. Only you can stop yourself. Building that foundation comes only with self-improvement.

2 comments:

John said...

hope im not postin this twice I dont think it went through..

Inspiring post man. It takes a strong person to come back from a loss like that. I lost $500.00 a few weeks back, which is a lot to me. Been in simulation since that week, about 3 now, and I can honestly say I'm feeling recovered, a lot of what helped was your psychology articles, I knew I wouldn't be ready to go live again since I had exhibited signs of a death spiral by overtrading after my loss, and my heart was racing every time I put on trade and I couldn't think straight, so I decided to walk away (stop trading live and go sim) and it's so much easier to trade when money isn't on the line, so anyway thanks for your awesome website =)

John C. Lee said...

Yes you are doing the right thing. Here are steps for recovery:

1) Stop trading immediately
2) Start paper trading to see if your methodology is actually working. If not then, you need work on this.
3) When you become profitable paper trading, you should start off with small positions. No large positions.
4) Once you are profitable with small positions, move on to normal sized positions.

Don't rush it, because one bad mistake can send you right back into the hole.