Things were Going Well Until this Slump | GoLearnForex

Things were Going Well Until this Slump

Written by article default Wednesday, 02 December 2009 11:29

I don't want to rain on anybody's parade this week with my article, but in reality we will all suffer from a trading slump during our trading careers. Believe it or not, you will most likely suffer from more than just one. In class we talk about being mentally prepared to face each trading day. Remember, trading is 85% psychological, 10% money management and "only" 5% strategy. So I felt this was a very important subject to address. My goal with this article will be to help you identify when you are in the early stages of this trading slump and then discuss some ideas to help you get out of this situation.

These trading slumps can come on so gradually that you barely even know you are in one until it is too late. For example, say you have had a couple of small losses over the past few trading days. Trying to keep that positive, upbeat feeling about trading is getting a little more difficult now. We find ourselves (notice I use the word "we," "I," like any other professional trader, still have trading slumps) sitting in front of our screens and not being as mentally focused and missing our setups that we have been waiting for. Or perhaps you see your setup, but now you are hesitant to click the mouse to enter the trade. Maybe you have no problem entering the trade, but then you start moving your protective stop the wrong way because you do not want any more losses. These are all early warning signs of the onset of a trading slump. One thing you may not have noticed once these situations start to occur is the mindset you are now in. By now you are actually feeling some internal anger, self doubt, frustration and possibly confusion. Perhaps you are saying out loud or to yourself some very damaging negative talk, as well. Maybe you start questioning why you are trading, saying things like "this always happens to me," "maybe I should reverse my signals and bet against my strategy," or a host of other self-damaging negative talk.

Obviously, we know that we cannot be at our best if we are trading while in this mindset. We need to get that confidence back, return to that sharp focus, get back in step with the markets and then last but not least, be able to execute that order once our strategy says it is time.

These trading slumps have you operating in an obvious sub-optimal state of mind. Believe it or not, we can get comfortable with this state of mind and a normal human reaction would be to maintain or make it worse than it is. Our minds can actually find comfort in these situations by accepting these negative thoughts. Especially if you continue to have a loss of capital in your trading account, your confidence and any motivation you have left will simply lead to other issues of anxiety and even more poor performance. Just think of it as a snowball rolling down the hill and getting bigger and bigger.

Trading the markets is unlike any other career you may choose. There really is no predictability in the trading environment. Trading is purely a probability business and the sooner a trader realizes this, the less stress they will have in their trading careers. Even accepting that trading is a probability business, there is still a level of uncertainty that can cause some levels of stress to enter your trading. Some traders thrive on stress and may have been very successful over their careers by embracing stress. Even for these traders, at some point, the stress levels get too high and eventually they start to doubt themselves and meeting their goals becomes very difficult. At this point, even the most experienced trader is showing signs of finding their way into a trading slump. Identifying and correcting these slumps as early as possible is crucial to your survival both financially and psychologically.

Let's discuss a few steps we can take to help us overcome these trading slumps in a more timely manner.
1. Trading journal to the rescue

The trading journal is a tool we discuss in class about how it is helpful to your success as a trader. It is like a map to keep you on the right course. If you stray from your winning ways, trading journals are great compasses to help bring you back to where you were.

We like to use these journals to help keep stats on our trading results, but they should contain some more information to help you. Along with stats we should also be recording:

* observations about price action that we may have noted during the trading day that may appear to be a reoccurring pattern;
* observations about ourselves; were there any mental or physical issues affecting me today or did I execute my trading plan accordingly without any hesitation?

Keeping track of these two categories in our journal is very helpful when it comes to offering insights as to if we need to correct our strategy, or is the issue with us as a trader when we start seeing early warning signs of a trading slump. By monitoring price action during the day, we will stay more focused on our trading and not be daydreaming while waiting for our setups. Watching ourselves and reporting on what we observe can help us find patterns in our personalities that may need to be addressed.

From the many trading journals I have reviewed, a common occurrence is to only record the negative incidents. Think about it for a minute, if we just record the negative and get off our trading track by a little and need some guidance back, are we going to find much help by reading how bad we were trading? Probably not, so I highly recommend that you record both the negative and the positive events you notice during the trading day. Keeping a log of how you were feeling during the day when you were "trading in the zone" and everything just worked like it should have, how did your body feel, what thoughts may have been passing through your head, etc., will help you regain this state of mind if you should lose it.
2. Time off from trading

Once you see the early signs of a slump coming on, you need to break this cycle of negative thinking, emotions creeping into your trading decisions, and frustration and lack of interest in trading. Take some time off from the markets. Remember, the markets were here before us and they will be here long after us. There will always be opportunities to trade. You do not have to leave for the islands for an expensive trip (does sound nice this time of year, though), just stay away from trading for a while and let your mind and body relax while finding something else to focus on.

Keep in mind that this anxiety is the result of your trading slump. This is a normal reaction. For most people this is how the body copes with stress. You simply have some expectations that are not being met at the moment and now your body is responding in its own natural way. Just keep in mind, that during this stress period, you should not be trying to trade your way out of the situation.

A common mistake people make when they "try" and take time off from the markets is they leave positions open. Simply get out of all your trades and shut down the platform. Otherwise, you are not actually taking the needed time off. This is a great opportunity to spend a couple of days with your loved ones or perhaps some time with another passion in life you may have.

This time away from your trading should not be viewed as something that will solve your problems for you. It would be nice to go away to that island and come back and have all your problems solved, wouldn't it? Unfortunately, it just won't happen like that. This time away is what will allow you to put things in perspective and take a look at the situation from a different angle. You will begin to see that your slump did not cause you to end your trading career. By seeing your situation in a more objective manner, you can make more rational decisions on what needs to be done to correct this trading slump.

Trying to keep trading through your slump will only cause you more problems later on. Getting away from the markets will also help relieve the excess anxiety and the fear that accompanies it. During my trading day, I always trade knowing what my maximum dollar loss for the day is. I call this my circuit breaker. Once I hit it, I immediately shut down my platform and leave the office. The same goes with my swing trading. If I am down a certain dollar amount during the week, I simply quit trading. One of the first signs of a trading slump is the start of an equity drawdown. By having these circuit breakers in place, I keep myself from drawing down my equity and ending up in a severe trading slump. If I were to keep trading, I would stand the chance of starting the negative self talk and doubting my trading decisions. Hitting these circuit breakers reminds me that something is not aligned with this trading session. Whether it be something wrong with me, my strategy is not conducive to the market, or it is just not my day to take money out of the market, I use this circuit breaker to tell me to take some time off before things turn ugly.
3. Interim checkups of your strategy

As trading is a business of probabilities, you are going to have drawdowns. These are normal events for all traders. I find so many people who have a few losses in a row wanting to immediately rebuild their strategy from scratch, or worse yet, they want to add more indicators and tools to try and make trading perfect. If you do this every time you have a few losses, you will never find a comfortable trading style. Consistency is very important to becoming successful in trading.

After you take some time away from the market to refresh yourself, you will be in a better position to review your trading journal and see just where your mistakes came from. Most of the time, you will find it came from you and not your strategy. You may have fallen behind a little and tried to use more contracts than you usually trade to catch up and that only made matters worse after some losses. Before changing anything in your strategy, make sure you have followed all your rules just like they are spelled out in your trading plan. If you find your losses are much larger and more frequent than when you back-tested your strategy, and your journal shows you were in an optimal state of mind to trade, then maybe you will need to repair your strategy. Make sure you do this in small increments. If you overhaul your entire plan at once, you may miss what was actually broken and compound your problems with too many changes at once.
4. Different outlook when starting up again

Returning from time off after a slump should help you see things much more objectively. For one, you should start focusing on market structure and not worrying as much about your account equity. Come back to trading slowly. Even starting out in simulated mode for a while will help you ease back into trading live. Here are a few things to consider once you do go back to live trading:

* Start out with small contract size until your confidence is back.
* After reviewing your trading journal, you will find which markets and timeframes you excel in; use these to your advantage while on the comeback and leave the lower probability trades for later.
* Print out charts of your trades. List all the events that happened on these trades. The key here is to regain your confidence. After a few wins under your belt and the charts to review how you did it, you will be amazed at how much easier it is to let your trades run for you.
* Reward yourself for following your rules, win or lose. We are looking for consistency here.

By being aware of these trading slumps in their early stages, I hope that you will be able to keep yourself out of the self doubt and negative self talk stages of this problem. These two things combined will result in very poor trading results and a mindset that can lead to a difficult situation to overcome. As I stated earlier, trading slumps happen to everybody, so be prepared for them in your trading career and you will be able to handle them in a very professional way. When measuring yourself against the market, keep in mind that you just need to be prepared for whatever comes at you in the trading arena.

"Success is the sum of small efforts – repeated day in and day out"

Robert Collier