Tuesday, March 03, 2009

Being in a trading hole

Been there, done that, will do it again...

From time to time emails from readers reach me asking me, what to do when you are in a hole. Something which worked last year really fine, suddenly stops working and you find yourself down 50% to 70% of last years profits or worse of your account value at the start of the year.

Stupid example? I don't think so! You can do it with 1 trade, if you are careless and stubborn. (I just proved it going long 30,000 FAS last Thursday in my 125k$ IB demo account, which is now reduced in size by 65% in just 2 trading days...just to prove to myself, that taking a 2,000$ loss on a big position is the correct way to trade... but I will hold it into extinction if necessary)

Being in a real big hole is something, which seems to happen to all traders over and over again. Strategies seem to stop working for no apparent reason and when you finally realize it, you are already down big time.

Question is, how do you stop and reverse the downward slide to climb out of the hole again.

  1. You need to have capital, so you have to make sure that you still have an account to trade. Which means: STOP TRADING NOW
    Stop for a day, a week, a month, as long as it takes. The market will be there waiting for you, when you are ready again.
  2. Markets change and you have to adjust your strategy to compensate or you switch to a new market which fits your trading strategy better.
  3. Something private: From time to time you will find articles about new markets in this blog. Most likely I'm in a hole or I'm feeling no longer sure in the market I'm trading at the moment. It might be that something changed in my trading environment, which causes me to trade at changed times, or I'm occupied with private matters which should take precedent to trading. The result is always the same: My trading system is not working the way I'm used to, I'm not getting the results I expect from trading and that causes me to look somewhere else. Usually when I do that, I write about it to get insight from you through emails or comments in the blog.
  4. One thing you know, when you have fallen in enough holes is, that you will come out of them stronger, if you have discipline and persistence. Go back to the basics.
  5. First answer this question:
    What has changed, the market or I?
  6. If its me, then the first thing I do is: I stop trading.
    1. Maybe my environment has changed and I have to adjust my trading system to the new setup. EG: You had 2 screens and you upgraded to 4 screens. Suddenly you are flooded with information and you need time to adjust. More screen space is great, but you can't process all information presented to you, you need to learn what is important and where to find it on your bigger screen space.
    2. You have less time for trading, but your trading system requires you to be present 100% of the market hours or you will miss your chances.
    3. Something really difficult: You are suddenly dependant on the money earned through trading. It's a huge difference, if you have a regular income and your trading profits are just a nice add-on, compared to having no income other than your trading profits.
    4. Maybe you don't have enough sleep, you drink too much, you don't exercise. Trading requires you to be fit. So take care of yourself.
  7. If it's the market:
    1. Question that assessment of the situation as markets usually do not fundamentally change very often. They do, but your trading system should capture quite a range of different market conditions or it would not have been profitable in the past. And that means, before you decide your trading system is not working, it's a lot more likely that something within yourself has changed causing the losses you experienced.
    2. If everything you do is the same you did in the past, then your system might no longer be working. You could try to tweak your system, but usually tweaking a profitable system leads only to an unprofitable system in the future.
    3. Try a different approach: Ask yourself, what is the basis of your system, why is it working, what are its components, what environment does your system need to work profitable.
    4. Once you have answered these questions look for a market which fits your system. No one forces you to trade ES, YM or NQ. There are a lot of markets out there and once you know, what your system needs, you can look specifically for these markets to trade.
  8. Once you found your market
    1. Start demo for a week
    2. Learn the movements of the new market
    3. Start trading small
    4. Forget the notion, that you will be whole tomorrow or the day after. You are in a hole and it takes time to get out of the hole.
    5. But know, that once you found your mojo again it will go very fast and you will be stronger and better prepared the next time you fall in a hole.

I hope these points help some of you currently in a trading hole. They helped me in the past and will help me in the future.