Trading Psychology Management

Trading Psychology Emotional Spiral

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 and it of course is a winning trade.  BUT to make the situation worse you then 'chase' the entry and it immediately reverses - another loss AND this is 3 in a row.  Ok 1 more try - this can't happen on every trade can it - pray mode?   

This time though you will be real clever.  You have at least noticed that the market is in a consolidation 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 hell with your trading method.  The market is at the range low AND per your new ‘on the fly’ plan you go long AND the range immediately breaks out giving you consecutive loser #4 - trading against a method trade that is going far enough 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 – your 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 that you have 'supposedly' accepted both as a part of your trading method AND as something that is inevitable in trading, into a surge of emotions that continually builds to a point where you can no longer accept anything.  As this eventually ‘spirals’ out of control – trading method becomes completely ignored AND is replaced by emotional responses and decisions for everything that is done.  Even if quitting was really the only viable thing to do at the time, the trading psychology spiral can cause an emotional response where this isn’t considered until the situation becomes so desperate that the trader can’t take it any longer AND does have to quit. 

This isn’t a discussion about emotions and trading, and the various fears and issues that keeps 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.  This is a discussion about emotions that are typically controlled well enough so that you ‘can’ trade AND then something happens where the trader loses that control and their emotions spiral - a series of consecutive losing trades is 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 will be different.  For instance, traderA may go into a panic causing them to spiral out of control, losing all self-confidence and self-trust, and ultimately more money than was intended.  On the other hand, traderB may go into a period of revenge trading, coupled with an increase of their trading size, as they are ‘sure’ that each next trade is going to bring them back to even.  Also a spiral out of control AND as the losses continue, ultimately a loss of more money than was intended. 

WHAT does traderC do?

Controlling The Trading Psychology Spiral

consider:  each time a trading psychology 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 to painful AND you will not be willing to trade any longer.

consider:  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 coming back and intensifying each time you have a rough period.  as well - you have lost the ability to 'count' on yourself when you need to do so the most.  to control a trading psychology spiral before you go out of control is a tremendous win in and of itself - also do this and get your trading back on track AND you will have made gains the value of which you can't imagine as you will know that you may have losing periods BUT you can trust yourself to remain in control and not magnify the damage.

Trading Psychology - IF Lose Discussion

• consecutive losers in short time - becomes thinking that you don't know how to trade

• method trades BUT losing - the method doesn't work

Trading Method - IF Lose Discussion

• were the trades really method trades?  IF yes - retain confidence and stay with the method based on your experience and consistency of repetition over the larger number of trades.  IF no - be sure that you are only 'base' method trading - it is fine if these trades lose AND there is no way to limit those times that they may be consecutive.

Self Awareness AND Realization

• transition - normal trading emotion to anxious/start spiral to out of control

• be aware - what do you most want to remember/think about to 'stop' the spiraling

If the acceptance of entering a trade with an unknown outcome, and thus further accepting risk and the inevitably of loss aren't enough, the markets also make those fast seemingly random moves, where just about the time you think you are going to be able to take a profit on a trade, you are instead scrambling to exit.  How can this not have emotional undertones?  AND since these situations are an inherent part of trading, it would then follow that emotion is also an inherent part of trading and is not going to be eliminated.  HOWEVER, do they really need to be eliminated in order to trade successfully OR is the objective to control the emotions - accept that they are going to exist BUT learn to control them instead of having them control you? 

This becomes the difference between traderA and traderB, where two traders who are both essentially trading the same method are having completely different results - traderA is constantly losing while traderB is constantly winning, the difference being that traderA has not gained the emotional control that keeps them from spiraling out of control AND as that is the prevalent case - traderA really is NOT trading their supposed method.

How many traders start the day winning, only to lose those gains and end up the day losing?  Did the markets change to cause the loses OR did the trader change, where after getting a couple of losses following their winners the emotions started to become a factor.  One more loser and the trader started spiraling AND when the market 'changed' back to be more similar to the conditions when they were able to get their winners, it didn't matter because the trader wasn't able to 'change' back.

IF there is a transition where the trader goes from acceptable emotion to trading psychology spiraling THEN there is a crossover point where IF you are aware of the situation, you have an opportunity to 'stop' this transition from completing.  What makes this difficult to do, BUT also makes it all the more necessary to be able to do, is that this is happening internally and chances are you typically would not be aware of it until it was too late AND may not even consciously realize it until the spiraling has taken over and you give into it. 

In light of this, take your key issues and write them on an index card AND stick them on your monitor, the objective is realization and making this available to your conscious as a reminder, instead of only available to your subconscious as a problem.  Thus, when you do this, BE SURE that you are writing short non-judgmental notes - DON'T let the 'solution' make the 'problem' worse. 

For instance, consider the combination of a build of emotions coming from consecutive losses which 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 is nothing wrong with 'base' method trade loses

• your trading results are fine when you 'base' method trade

Now consider the same situation BUT different notes:

• don't be a stupid idiot and overtrade congestion like you always do

• you are going to lose your ass and end up with another losing day like usual

• you do this same crap every day and the same thing happens

• you have no reason to even trade if this is all that you are going to do

Does this seem far fetched, does common sense indicate that no one would ever write notes like these?  Absolutely some people would write these note AND worse [been there - done that], as they take the attitude that this kind of emphasis on what the problem leads to is an emphatic warning that will keep it from occurring.  But instead this backfires, as most derisive self-talk of any kind tends to do.  Now not only are the emotions stemming from this kind of self-talk in your subconscious where we know their potential to become debilitating, you have also put them into your conscious.   AND since you have them in writing - right in front of you on your monitor next to your trading charts AND SINCE what you have written is a very prevalent trading psychology problem - WHERE do you think your focus in going to be?  Do you think you will continue to focus on those charts and trading method OR do you think you will keep 'seeing' your notes and intensify the problem and thus the speed of your trading psychology spiral?  The solution makes the problem worse.

Remain Neutral

• remain neutral - another note for your index card

A different approach may be to write notes that include the things you can remember yourself doing or feeling as you transition from emotion to trading psychology spiraling, for instance:  shortness of breath - sweating - squirming in your chair - unable to sit down.  AND as the spiraling becomes more intense:  cussing - screaming - throwing things - breaking things.  Until the spiraling is out of control:  panic - desperation.  Clearly there is a whole list of physical responses to uncomfortable emotional situations [AND another been there - done that].

This isn't what I mean by self awareness.  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 actually will just make the situation worse - you are human AND humans have emotions AND 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 - that will 'push' me back to tmethod AND 'away' from trading psychology.

I also want to mention neutrality in relationship to winning; it is my contention that the more ecstatic you become from your winning trades - the more you will trading psychology spiral during a period of losing trades.  Of course you are going to be 'happy' when you win, this is also a human emotional response to 'good' things happening BUT as a professional who is doing their job, and one where the significance is results over time, being as neutral as possible to single events is an important objective.

Something that I have found myself doing, and actually didn't realize I was doing this until someone in the chatroom told me how obnoxious it was, which is also very interesting to me as I think about some of the NLP concepts that I studied - AND that is 'clicking' my fingers on the surface of my desk.  Somehow this became an 'anchor' back to those things that I want to be sure that I am most considering when I am having one of my more difficult trading periods.  It seems to 'calm' me down AND 'push' me from any rise in emotion from getting out of control, back near neutral as my focus goes to 'base' method considerations only.  I know that I don't and cannot trade 'base' method 100% of the time - another one of those human issues of not being perfect.  Sometimes it doesn't matter, trade in the direction of a 'big' swing and a more aggressive or 'sloppy' entry isn't much of an issue.  Now try the same thing in congestion OR any market condition that you find to be most problematic, then you have an entirely different situation, which is why I have continued to write regarding the ability to be sure that during the most difficult times the trader 'knows' to only 'base' method trade to the extent that is possible.  Like the index card notes, anything that you can use that 'pushes' you back to your 'base' method, 'anchors' you to that method, is something I believe you will find very useful.

WHAT does traderC do?  traderC is the trader who remains the most neutral in winning AND losing - the most neutral in all situations, and it's this neutrality that becomes essential in keeping the emotions from becoming a trading psychology spiral as the trader can 'accurately' evaluate their losses in terms of method AND this trader will only trade their most 'base' method setups after any difficult period - AND IF these loss, so be it, that has already been accepted.

 

Trading Method -vs- Trading Psychology

This comparison is not for debate, regardless of emotion and trading psychology AND it's potential affect on the trader, ultimately it is only the proficient implementation of tmethod that is going to allow a trader to be profitable.  BUT - WHAT IF you can't evaluate your trading in terms of 'base' tmethod - WHAT IF you do not have the 'ability' in those difficult times to ensure that you are only trading 'base' method?  Clearly, you then have an impossible situation, one that probably won't 'allow' you to win under the best of market conditions - one that will guarantee that you are going to lose during the difficult market conditions, and unfortunately overall.

Paper Trading

Paper trading is a subject for another discussion, but it is also appropriate to mention it here.  IF the objective is to ensure that you are trading 'base' method to keep from trading psychology spiraling OR to keep the spiral from going out of control - THEN how is this possible if you haven't already 'proven' to yourself that you have and can trade this 'base' method? 

Granted, being able to 'base' method trade on paper is no guarantee that you will also be able to do so with real money, however I can't imagine that this could possibly be done if you can't do so on paper. I strongly believe in paper trading as part of the transition into real money trading, unfortunately though I think that many traders 'waste' their paper trading efforts and get little benefit from doing so. 

Two reasons paper trading is not of value:

• The paper trader is looking for profitability and not proficiency and thus have no 'cushion' when having to trade real money.  For instance:  a trading swing goes 5 points but the trader only gains 1 point from the swing - yes this is profitable BUT no this is not proficient, and I would anticipate that this lack of proficiency where a trader wasn't realizing closer to 60-70 percent of the potential of a given trade, is going to manifest itself in real time losses across the greater number of trades.

• The paper trader is too experimental since real money is not at risk.  Thus, they gain no basis for accurate trade evaluation.  Their results are random, and the ability to ensure that they are 'base' method trading during difficult periods will not be possible because they have never developed the discipline and repetition of only method trading during the paper trading progression stage.  IF you are paper trading, and doing so differently than you would real money trade - THEN you are making a mistake that is going to show itself when real money trading and especially be of no use to you for eliminating trading psychology spiraling.

Learn To Laugh

Good thing my wife can't read this - she would never believe I have written it, and then she will lecture me for the next month on ways that I should do so in my other life; did I ever tell you that I have 2 teenage daughters?

Anyway, a little laughter can be such a wonderful thing in relieving some tension and putting trading in perspective.  It's just impossible to spend the amount of time that we do, trying to continually manage unknown outcomes, and not have some relief to the situation BUT while still confronting it.  Being able to laugh at what you 'feel' was a 'dumb' trade and go on to the next setup - instead of going ballistic on yourself for being the most stupid moronic brain-dead trader alive, which is just about going to guarantee you are going to spiral if that next trade is also a loser - may be more beneficial than your 'favorite' trade setup.

 

Discussion From The 8/3/2005 Trade Journal

consider: you go long and it goes down - you go short and it goes up. you start shaking - you start sweating - you can't breathe. you are ready to throw your computer out the window AND jump out right after it. AND the market has only been open for 30 minutes - WTF is going on.

WHAT do you do when you are having a BAD day - quitting is not an option?

chart3:  did you trade the first 30 minutes - what/where were your trades?  what kind of trading period did you think this was - 'good' or 'bad'?

chart3:  i often discuss the charts on the journal in light of where the setup/triggers were - why a trade entry may be a misread - how an entry price can be improved using breakpoints into break outs.  BUT on this chart i don't want to discuss the trades - i want to discuss the situation - a situation that regardless of whether these are good trades or bad trades they were trades that were done which was a series of 4 quick consecutive losers after an opening sell which was really dumb luck with the speed/distance that in our direction.  Again - doesn't matter what/where the trades were - only that they were done and a next trade will also have to be done - AND sure want to do what is possible to keep 4 from becoming 5 from becoming 6...

so the situation remains - you are trading and you are losing AND now what - quitting is not an option.  one trader mentioned - evaluate whether the market is difficult OR is it my trading that is 'bad'.  another trader mentioned - stick with your method/days like this happen.

WHAT is the very most important to me?  that i keep my 'cool' AND don't let myself go into a trading psychology spiral AND that i retain my self-trust - i know how to trade AND i know that i know this - i can't let myself doubt this because of a bad trading period AND expect that i have any chance whatsoever to get 'back on track' again.  similarly i can't get down on myself AND start 'beating' myself up - how can i retain self-trust and beat myself up too - i have to 'stay on my side' if i am going to have a chance.  i am speaking to myself here in the first person as this is the kinds of things i am thinking about - i am telling myself what i know and what i can do - instead of getting down i am trying to 'build' myself up.  as in anything endeavor - you can't work with someone that you are fighting with - trading is no different AND absolutely a person can fight with themselves to a debilitating extent - can't let this happen.

regarding the 2 things that different traders mentioned - AND i did think it was interesting that only 2 people had anything to say?  to you 2 and myself i want to say that i am very sorry that it's only us that every has to deal with these problems/issues. 

(1) evaluating the market -vs- my trading - i mentioned that this is really not something that i want to do because this is a real time situation that must be dealt with to continue trading - this is not the same as evaluating results at the end of the day and trying to make a determination of how you did compared to your assessment of the market's tradability.  i mentioned how important that not going into a trading psychology spiral is - what if you decide that the market is 'easy' BUT your trading is garbage - i would think this is going to worsen the situation AND can lead to some of the trader typical negative self-talk like 'the market is so easy and all you do is lose why don't you just quit trading - hell why don't you just shoot yourself because you are too pathetic to do anything else either - etc etc etc'.  you get the point.  anyway - i don't want to do anything that is judgmental - too much trading psychology risk involved to do this. 

(2) stick with your method/days like this happen.  stick with your method - YES - absolutely this is paramount.  BUT what about - days like this happen?  i mentioned my thoughts on this - that i had a problem with the word days AND i will also add a further problem with thinking like this in general - again i am talking trading psychology.  i don't want to get down on myself BUT i also don't want to let myself 'off the hook' - i want to retain the 'fire' and if i start think about days like this happen i think i am putting defeatist ideas in my head - as well as ideas that the day is over and therefore nothing can/will change - and how can i change thinking like this?  AND after all - it's 30 minutes into the day with the entire day ahead of myself - i am not 'writing the day off'.

so none of these responses are about right or wrong - i was/am telling you how i would react to talking to myself like that and why it would be a problem.  what i want to emphasize is the concepts and why i want you to consider what you are saying/how you are responding AND be sure you do nothing that is judgmental-defeatist OR in anyway assumes that the situation won't change - isn't going to change.

as the discussion went on - the following was mentioned that the words 'stick with the method' was too easy - after all weren't you trading the method when you got into 'trouble'.  this may be semantics and have personal meaning - for instance if 'stick with the method' means that yes the method was being traded AND it was a series of 'good' 'method' trades that were taken AND they just happened to be consecutive losers - then YES stay with the method as mentioned above.  BUT what if these weren't method trades that were losing - then the words are meaningless to the trader who would HAVE to answer this way about the trades that were taken. 

should this be determined - definitely.  BUT is this judgmental and shouldn't be done?  i answer this no AND say that this shouldn't be judgmental - this should be factual - yes it was a method trade/no it wasn't a method trade - answer the question AND if the answer is no then go forward with this realization and ensure that you are only method trading.  i also like this attitude approach - because i like the concept that i win/lose by my ability to method trade AND that it isn't trading psychology that is the determinant of my trading OR that i am allowing it to undermine my trading.

specifically what happened for me - i took a winning sell and a losing buy which i am fine with.  looking at the chart the real problem was with the buy re-entry compared to the blue dot sell - this is really where i go into trouble AND then reversing out of buy2 into sell2 just didn't go far enough as it held s1 - a decent trade that just didn't work BUT as it was 3 in a row at that point i don't think i am thinking like this.  then buy4 AND i just went to a lower high instead of breaking the channel at the left and testing back to the floor pivot.  good-bad-who cares - go flat and get your head straight.  first thing i did was to decide that if i was going to trade the russell i was only going to trade the russell - no additional market distractions could be had at this time.  i was flat the euro at this time AND long the bonds and went flat bond - not a good decision simply going flat instead of entering a trailing stop BUT so be it - i put myself flat all markets.  what about the purple dot sell - should look like a very good setup/trigger on the chart AND i agree that it was except it was 1-2 minutes before a news release AND this just wasn't the time to get caught up in a news whipsaw that may add to the existing tenuous situation - so a trade that i normally would take was intentionally missed for this reason - which is why the red dot3 sell was done instead.

also - as my trading tends to include a number of reverses that are often 'pivot' trades of which a number can't be defined as 'base' method trades - i made the additional decision that i would trade 'base' while trying to get back on track - that i wanted to be more selective for now.  the sell after the news that was done was a winner AND as you see on the sheet the next 2 traders were winners and i was able to spend the next hour getting back to positive.  going forward things remained 'on track'.

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