A friend of mine in the pit had been having a rough time of late when he asked me a typical question among us traders – How do I come back from a loss? Since he had been having a “rough patch” and not just one bad trade, I gave him the following advice that is to be used over a period of time.
First I asked him, “What does your trading journal look like – or maybe you don’t have one?” He didn’t think it was necessary, which was his first mistake. It is critical to keep a trading journal. In my journal I ask myself every day “Did I follow my trading plan properly? Did I do anything wrong and if so, why?” If I did follow my plan correctly but I lost money, I am not hard on myself. Sometimes this happens! If I didn’t follow my rules but still made money, however, that’s a problem. I highlight these days so I never repeat this fatal flaw. One of the worst things one can do is ignore their rules and make money because then they feel that “winging it” is a good plan. It is not.
If this happens, you have to ask yourself “why didn’t I follow my rules?” Was it lack of confidence in the system, fear, or did your ego want to fade to trend to be the hero that “sold the high?”
If you lack confidence in a system, paper-trade it religiously and keep a massive amount of statistics on the outcomes. Be honest with each trade, and if the results are good, immediately ban all second-guesses. If you learned how to properly play blackjack and the dealer has a six showing while you were dealt a ten & a nine for nineteen, would you HIT IT because “maybe this time the dealer won’t bust?” Of course you wouldn’t! You know that the long-term outcome of that decision would be certain disaster. It is the same with trading: don’t question a trade if the statistics show it’s a winner over the long term.
Fear could be because a trader doesn’t believe his system yet, but it may just be the fear of being wrong, which is another ego-based problem. You have to let go of being right. Trading is about probabilities and making money, not being right or wrong.
I have often found that traders who used ego-based decisions to either tinker with their system or break their rules added little to no value. In fact, it almost always hurts more than it helps. Trading for ego satisfaction is not a good idea since the ego risks getting damaged during these rough trading patches. I like to go back and look at my trades over the last week and month to see how they performed and if I am repeating mistakes. If I bought or sold too soon, I want to find out why. Be honest, and ask good questions: “What worked? What will I do differently next time? What was I feeling when I ignored that trade?” Keep notes on your trades you liked but didn’t make. What held you back? Do you notice any patterns there that are causing you to miss opportunities? Then…Fix them!
My friend listened intently and took notes. He will be a better trader for it.
Trade well and follow the trend, not the so-called “analysts/experts.”
Larry Levin is the Founder & President of Secrets of Traders – a commodity trading educational firm dedicated to helping traders succeed in the futures markets. Larry trades the S&P 500 at the Chicago Board of Trade (currently known as ‘The CME Group’), now the world’s largest and most diverse financial exchange. Larry has been trading his own account or company’s proprietary accounts since 1993, trading an average of 2500-3000 E-mini S&P contracts a day.
Larry appears regularly on CNBC, Bloomberg Television, Rob TV, BizRadio, as well as various other media outlets, providing his expertise and insight on the current market.