I received an email from a reader that reflects an ongoing issue for many traders and investors who are doubting their methods: Today's article is on how you can create a consisent routine to be able to execute your investment and trading plan without hesitation after a losing trade. Vince writes: "Your commentary is truly excellent. And your batting average has been exceptional during this most awful market I have ever seen. Do you have any general advice that you would be willing to offer on a very serious problem that I, and perhaps many others, am experiencing in recent weeks? The length of the bear market, and the really substantial financial damage inflicted at my age (51), seriously damaged my investment psychology. Consequently, while I read and believe your judgment calls, for several months I haven't been able to get myself to pull the trigger to try to begin to rebuild from the carnage. So, I guess you might say I'm suffering from the "deer caught in the headlights" syndrome. Which results in experiencing losses, and not experiencing the gains. These violent moves in both directions, changing on a dime without notice have left me at sea. How does one begin to work oneself out of this state of mind after what we have been through?"
Vince is suffering from the fear of trading after a string of losses that many traders experience at one time or another. The reality is that human beings tend to do things that either maximize pleasure or minimize pain. And not pulling the trigger on trades becomes a way for traders to minimize pain, as mentally the thought is that we are not causing ourselves any more damage if we do not trade. The problem is that we then remain stuck in a state of fear until we can TRUST our method again and start taking trades. This is why it's so critical to have a trading plan that is tested and then be able to stick with it. Here's a game plan for getting yourself back on track:
1) Define Your Trading Plan: If you already have a plan, reexamine it. Are you following your rules for entry, exit and money management? Does your plan still have an edge in the current market conditions?
2) "If In Doubt, Get Out": Who says you have to trade every day? If you are not pulling the trigger on your trades, it is because you lack confidence in yourself or your plan. Try taking a step back for a short while, where you consciously decide not to trade real dollars, but that you will work on paper trading your buy and sell signals. Sure, it's not the same as trading real dollars, but this step allows you to work on executing your trading plan. I have found systematic trading to be much easier than discretionary trading, because it helps take my ego out of the equation. I focus instead on the execution of buy and sell signals, as opposed to my ego wanting to be proved right. Paper trading will allow you to get refocused on execution of your ideas.
3) Measure Your Results: Too often traders may have a good plan but then lose sight of measuring their results on a regular basis. What this leads to is that 90% of your trades may be done properly, but it is those 5-10% of your trades that eat you up with big losses. If you monitor your results closely, you should start to develop a "Success Profile" which defines what your best trades look like. Once a trade doesn't fit this Success Profile anymore, you should look to exit (whether at a profit or a loss) as your edge no longer exists.
Price Headley is the founder and chief analyst of BigTrends.com.