The Break Even Trader: Giving It All Away in Big Chunks

[ajhunter 10]

The title describes my trading experience. I currently seem to trade well for a month or two, making a set amount of money each day, and then one day I'll break all my rules -- take out stops, double-up losers, only counter-trend trade, completely refuse to be wrong -- and lose the equity that I had made.

 

This has to be psychological! I personally think that I have a version of "fear of losing" combined with "overconfidence for my skill level". When I have traded well I begin to gain confidence and thereby loosen my adherence to my rules. Instead of taking my early morning loss on what I clearly recognize as a bad trade, I presume that I can simply trade my way out of this "difficulty." Good Luck. Why would today be any different than yesterday or any of the other days and weeks that I have made my monetary goal? That's what I seem to be telling myself as I fight the trend, and then fight some more, and some more... and why not a curtain call as well.

 

Well that may be part of the problem right there -- misconstruing trading well with a monetary goal? Looks like I have to do a lot of investigating of my beliefs.

 

Just wondering if anyone has any techniques to avoid this mistake? Or, if anyone has overcome this problem? I guess in time the pain will become too great and I'll learn not to break my rules.

[MightyMouse 12]

The title describes my trading experience. I currently seem to trade well for a month or two, making a set amount of money each day, and then one day I'll break all my rules -- take out stops, double-up losers, only counter-trend trade, completely refuse to be wrong -- and lose the equity that I had made.

 

This has to be psychological! I personally think that I have a version of "fear of losing" combined with "overconfidence for my skill level". When I have traded well I begin to gain confidence and thereby loosen my adherence to my rules. Instead of taking my early morning loss on what I clearly recognize as a bad trade, I presume that I can simply trade my way out of this "difficulty." Good Luck. Why would today be any different than yesterday or any of the other days and weeks that I have made my monetary goal? That's what I seem to be telling myself as I fight the trend, and then fight some more, and some more... and why not a curtain call as well.

 

Well that may be part of the problem right there -- misconstruing trading well with a monetary goal? Looks like I have to do a lot of investigating of my beliefs.

 

Just wondering if anyone has any techniques to avoid this mistake? Or, if anyone has overcome this problem? I guess in time the pain will become too great and I'll learn not to break my rules.

 

Everyone has done that. I certainly have, but i don't now.

 

In my mind it is akin to playing rags when you on a streak in poker or playing on tilt after a big loss.

[Tradewinds 12]

It's not all psychological. I think it's helpful to know how our emotions and behavior affect our trading, and that is certainly a big part of trading. But the market is "tricky", in the sense that it is difficult to predict for most people. If 90% of traders fail, then they must be using the wrong information, tactics and strategies. And the people who do know how to make money in the market, probably are not going to tell you how they do it. They will give you little hints here and there, but intentionally leave out critical information.

 

It is true, that people can be given a winning strategy, and fail to implement it. So it isn't all about having the right knowledge. But if we don't have the right knowledge, and a winning strategy, then no amount of psychological discipline will ever make us a winning trader.

 

The market often shows signs of reversing direction, consolidates, and then continues. The market often seems directionless. It often seems like it is trying to "fake you out". That is what causes the problems.

 

Are you trying to constantly have an order in the market, rather than waiting patiently for the best set up?

[Tams 20]

The title describes my trading experience. I currently seem to trade well for a month or two, making a set amount of money each day, and then one day I'll break all my rules -- take out stops, double-up losers, only counter-trend trade, completely refuse to be wrong -- and lose the equity that I had made.

 

This has to be psychological! I personally think that I have a version of "fear of losing" combined with "overconfidence for my skill level". When I have traded well I begin to gain confidence and thereby loosen my adherence to my rules. Instead of taking my early morning loss on what I clearly recognize as a bad trade, I presume that I can simply trade my way out of this "difficulty." Good Luck. Why would today be any different than yesterday or any of the other days and weeks that I have made my monetary goal? That's what I seem to be telling myself as I fight the trend, and then fight some more, and some more... and why not a curtain call as well.

 

Well that may be part of the problem right there -- misconstruing trading well with a monetary goal? Looks like I have to do a lot of investigating of my beliefs.

 

Just wondering if anyone has any techniques to avoid this mistake? Or, if anyone has overcome this problem? I guess in time the pain will become too great and I'll learn not to break my rules.

 

you have to do some soul searching and ask yourself if you really know how to trade, or why to trade.

nobody can do the assessment for you, you are the only one who can answer that question.

 

to me, trading is like riding a bicycle.

when you first learn to bike, you would fall a few times.

but once you got up and can go around the block a few times, you are not supposed to fall anymore.

 

At least not falling down for no good reason.

e.g. you go speeding down a slope... and you fall. You know why you fall... the purpose of the ride was different from the ordinary ride. You used to ride the bike from point A to point B, maybe to the corner store for milk (transportation), or around the block 10 times (for exercise).

now if you fell when you sped down a slope... you were not doing the transportation thing or the exercise thing anymore... you were looking for excitement, and you got it.

 

there is a purpose to trading. It is different to everybody.

some trade because they lost their job.

some trade because that's their living.

some trade because they like to gamble.

some trade because they are bored.

some trade... because they like the excitement.

 

find your purpose... and enjoy the ride.

[SIUYA 11]

 

Just wondering if anyone has any techniques to avoid this mistake? Or, if anyone has overcome this problem? I guess in time the pain will become too great and I'll learn not to break my rules.

 

as a suggestion - open another account for your punting/gambling/no rules trading, and keep your strict rules based boring but profitable trading separate.

One issue with this idea is that you will want to favour the strategy that makes you money on the days its profitable and possibly it will re-inforce some bad habits....but as you have those already and this is about trying to separate the "why" as opposed to much else it might be worth while.

 

This works for me in that I have various accounts and strategies. It does not stop me from making mistakes, but it keeps me focused, and any actual drawdowns get compartmentalized and dont blow up the account.

[ajhunter 10]

Thanks to All,

 

Tradewinds -- Yes when I am struggling I am not patiently looking for value but rather wanting to be in the market but nevertheless swimming against the current all day.

 

Tams -- I'm going to take the bicycle analogy to heart. To be a proficient -- mature -- trader means that you simply don't respond in the fashion that I occasionally do. Time to grow up.

 

Reminds me of one my favorite Posts on TL concerning the how to avoid trading the Chop. Response:"Don't do it".

 

Siuya --I've never thought of that. If I'm feeling off and fighting my better judgement I should just my modest loss and then trade "badly" on the Simulator account. At the end of the day I'm sure I'll be glad I did. Interesting.

[Richie1977 10]

simply have a max loss for any trade, and or max loss for a day...

[peterjerome 10]

The title describes my trading experience. I currently seem to trade well for a month or two, making a set amount of money each day, and then one day I'll break all my rules -- take out stops, double-up losers, only counter-trend trade, completely refuse to be wrong -- and lose the equity that I had made.

.

 

sounds like you know exactly WHAT you are doing wrong....now, just STOP doing it.

it is within you to do that.

 

peter.

[Kerlchen 10]

I think many of us would deny that we get greedy. At least I thought for myself, oh no, I cannot be greedy. The moment one makes a good trade one switches from managing the loss and the focus is on how much more one could make if the stake was doubled. I have decided to stay with one single sentence, that is what I tell myself now before each trade: "How much am I going to lose?"

[MightyMouse 12]

I think many of us would deny that we get greedy. At least I thought for myself, oh no, I cannot be greedy. The moment one makes a good trade one switches from managing the loss and the focus is on how much more one could make if the stake was doubled. I have decided to stay with one single sentence, that is what I tell myself now before each trade: "How much am I going to lose?"

 

Like any and everything else in trading, there are no absolutes. Greed can be bad if you apply it at the wrong time, sure. But greed is also why some traders make hundreds of millions of dollars a year and others are part of the 95% who lose. The trick is to apply greed when it is fruitful to apply it and avoid it at other times. To think that greed is always bad because one's religion or society or their grandma told them so will confine one to the same mediocrity that they are trying to break out of.

[ScottB 10]

I have done what you describe in the past but as another trader said, I don't any more. However, if you are doing what I did, you might be surprised and not very happy to learn the real reason.

 

Check your winning periods vs. your losing periods. Consider the possibility you are trading much the same during both periods. In the winning period, you mostly follow the rules but break them every once in a while in "special circumstances". The "special circumstance" trades go for you; you make money and you tell yourself, you did the right thing (breaking your rules) because these were after all, "special circumstances".

 

In the losing period, you mostly follow the rules but break them every once in a while in "special circumstances". The "special circumstance" trades go against you; you lose money and you tell yourself, you did the wrong thing (breaking your rules) because you only thought they were "special circumstances".

 

However, in the losing "special circumstance" trades, you have that one (maybe a couple) that get away from you and you have an outsized loss which severely hurts your account.

 

It is so easy to tell yourself, if only... I would argue that isn't the issue at all. You were trading the same way the entire time, if one of the "special circumstance" trades you won had gone just a litte bit further against you, it had the potential to be one of the big losers.

 

Your system, style, whatever you choose to call it may be a large part of the probelm in that, you don't really have one, just the illusion of having one.

 

I know all of the above was true for me and I blew up a couple accounts before I figured it out.

 

Best Regards,

Scott

[Rande Howell 10]

If your methodology and platform are sound so that you have an edge and tweaking your trading plan has not proven to be the "answer", self sabotage often comes down to our beliefs about our worthiness. Confidence without humbleness becomes arrogence which begets self deception. It a great short term cover-up for having to deal with uncomfortable self limiting beliefs of unworthiness (or a sense of having to prove the self by performance to have meaning). I suspect what you speak of as growing confidence is actually letting go of the discipline to stay in the zone that produced the positive results. The moment you move out of the zone governed by discipline, you fall prey to temptation. Self sabotage is sure to follow. This is an adaptive pattern your brain has built. It is not your truth. But it is self fulfilling as long as it stays out of the light of your awareness.

 

Not sure if this fits your situation. This is something I see in traders when they bring a mindset into their trading room that is zoned in on proving the self by performance. Your being and your performances are very different.

 

Rande Howell

[Kerlchen 10]

Good point mighty. Is it not hitting the opportunity with maximum strength rather than greed to be in the club of 5% who win big?

[TheNegotiator 13]

What I see is the breakdown of how this type of trading actually occurs. Usually it happens, after a period of decent gains, but not such good gains that one or two really bad and incorrectly risk managed trades couldn't wipe out. Good traders know when they are wrong quickly then they protect their accounts. Less experienced traders take longer to see they're wrong and then can't accept such a big loss and so it becomes bigger or additional trading on the same move or day adds to the losses. There is another point that leads up to these sorts of losses. Not applying strategies to appropriate market conditions. It seems obvious before and after the fact, but trying to fade the market when it has broken out of a consolidation range is likely to end in tears. So I would say that there is some technical, some psychological and some experience in stopping yourself from trading like this. Remember, probably one on the biggest tools for risk management a trader has is his arse - when it's used to sit on his hands.

[Brookwood 10]

Great replies in this thread! ScottB's reply really points to the Achilles' heel of discretionary day trading. It's at your discretion! I don't know if another set of rules will help you with this problem since part of your problem is breaking rules, but write into your plan ( if you haven't done this already) that you will turn off your computer- not just "stop trading"- turn it off if you have a maximum draw down for the day. OK we both know that won't work. So call your broker and have them set a "circuit breaker" on your account so that if you lose X% you are locked out until 5pm. Then it's out of your hands, which works in the same way that following your trading plan takes each trade out of your hands, which works better than "just this once". You'll be very frustrated at the time, but you will wake up the next day and think "wow I'm so glad I made that rule"!

Carter addresses this subject in his book which is well worth a look from a rules and trading plan angle.

Live to trade another day!

[MightyMouse 12]

Great replies in this thread! ScottB's reply really points to the Achilles' heel of discretionary day trading. It's at your discretion! I don't know if another set of rules will help you with this problem since part of your problem is breaking rules, but write into your plan ( if you haven't done this already) that you will turn off your computer- not just "stop trading"- turn it off if you have a maximum draw down for the day. OK we both know that won't work. So call your broker and have them set a "circuit breaker" on your account so that if you lose X% you are locked out until 5pm. Then it's out of your hands, which works in the same way that following your trading plan takes each trade out of your hands, which works better than "just this once". You'll be very frustrated at the time, but you will wake up the next day and think "wow I'm so glad I made that rule"!

Carter addresses this subject in his book which is well worth a look from a rules and trading plan angle.

Live to trade another day!

 

Once again, there are never clear cut rules in trading. First, if you lose your objectivity and are trading irrationally, you should shut down your account, walk away, do what ever you do before you take your first trade or as soon as you realize that you are not of the right mindset to trade. If you take losses and are doing everything right, and still have to ability to do everything right, then there is no good reason to shut your computer down. In fact, you shouldn't think about your p&l during the day.

 

You need to:

know how to hold em

know when to fold em

know when to walk away

know when to run

You don't count your money when you are sitting at the table

There'll be time enough for counting when the day is done.

[MadMarketScientist 11]

There are simply some tremendous posts here that all traders should read regardless of skill level. I can't bring much more to the table than what has already been said so convincingly.

 

A few little tidbits that came to my mind:

*When you do have "that" day where you break all your rules and end up digging yourself a huge hole - wiping out days/weeks of profits you need to penalize yourself. You need to come up with something such as you won't allow yourself to trade for the next 5 days. Or something you hate doing - like go run 6 miles, eat your vegetables whatever - something you find painful. What I find is just the fear of the penalty many times will correct the impulse to break the rule.

*Have circuit breakers. Have a drop dead time of day you can trade, a drop dead position size, number of trades, etc... Make it as simple as possible and never veer from that -- no matter how hard -- force yourself to walk away - literally unplug the system if you have to -- beat the impulse - in a few minutes you'll feel fine.

 

MMS

[steve46 12]

Sir or Madam

 

Because retail traders usually operate solo, there isn't an office culture (a model of successful behavior or support) that you can turn to...If you can't find a good solution, it may help you to find a skilled person to monitor your actions...and offer a comment on a regular basis. Not easy to do but it is preferable to "bleeding" your account.

 

The other possibility is that you may not have sufficient experience to know when to quit (on an intraday basis)...For the ES market for example, I know what to expect in terms of length of line and average true range...once I capture that range, I ask myself whether the odds favor an expansion of volatility sufficient to warrant additional exposure to risk...

 

It may be that you need to find a solution in both areas..

 

You can always PM me if you need additional comments.

 

Best Regards

 

Edit

 

Dont know if this helps but it is a simple example of how one can make a conscious decision to step aside...in the attached chart you see price open and retrace down to a predetermined blue bar (my entry signal)....from experience I can forecast that institutional participants are going to mark this market up 10 points...I "know" this because of several factors (day of the week, economic reports, bond market reaction, and other data items)...once I get my ten points, I am not going to putz around and take the chance of giving it back...so at around 9:20 or so this AM I was done for the day...period...

Edited April 15, 2011 by steve46

[Tradewinds 12]

...in the attached chart you see price open and retrace down to a predetermined blue bar (my entry signal)....

 

Steve, thank you for posting the chart. I find it very interesting. The blue bars seem to correspond to the tails of the candles of the swing highs and lows. Although in other posts you call them something like, supply/demand nodes. The range that the blue bar indicates, seems to be a better guide than a simple, thin price level line. From looking at your charts, there seems to be a range that price operates within, at those transition points rather than a specific price. Thank you again, for pointing this out.

[Tradewinds 12]

Confidence without humbleness becomes arrogance which begets self deception.

 

What I find interesting is the chain reaction, and multiple levels. The typical trader talk is about fear and greed, and that's fine, but there are other branches on the tree. And there are roots beneath the ground that are unseen.

 

So gaining confidence is not the "end game". It's really just "level one" in a multi-level game. Once the confidence is acquired, at some point, the temptation is to branch off into arrogance. That story has probably been told a million times.

 

Arrogance blinds the self, and then branches off down yet another path, to self deception. There are many forks in the road.

[starborg9 10]

Patient: Doctor, it hurts when I do this.

Doctor: Then don't do it.

[ajhunter 10]

Great stuff everyone. ScottB's post resonates strongly:

 

I have done what you describe in the past but as another trader said, I don't any more. However, if you are doing what I did, you might be surprised and not very happy to learn the real reason.

 

Consider the possibility you are trading much the same during both periods. You were trading the same way the entire time, if one of the "special circumstance" trades you won had gone just a litte bit further against you, it had the potential to be one of the big losers.

 

Your system, style, whatever you choose to call it may be a large part of the probelm in that, you don't really have one, just the illusion of having one.

 

You can get away with weak discipline some of the time -- when you have a feel for the market -- but when market conditions change and you don't have robust discipline than you don't have a system and the facade is up.

 

Thanks

[TheNegotiator 13]

What I find interesting is the chain reaction, and multiple levels. The typical trader talk is about fear and greed, and that's fine, but there are other branches on the tree. And there are roots beneath the ground that are unseen.

 

So gaining confidence is not the "end game". It's really just "level one" in a multi-level game. Once the confidence is acquired, at some point, the temptation is to branch off into arrogance. That story has probably been told a million times.

 

Arrogance blinds the self, and then branches off down yet another path, to self deception. There are many forks in the road.

 

I would say that confidence is not the precise goal. It helps. But only if it is confidence through understanding and knowledge of yourself. For example, if you are confident because you just had a good run of trades, I'd say that unless you have a good deal of experience, you'll give it all back then some.

[DHOYT 10]

Have you read the book "Your Money and Your Brain" by Jason Zweig? I just started reading it. It's pretty interesting. Don't know if it will help yet though.......