Psychology

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In a post from yesterday – the one about pain avoidance – Dutch asked some good questions in the comments section:

Tim. You lost nearly HALF of your account, then octupled it in about a year. That is incredible!
What did you psychologically do in order to turn the corner?
What did you change in your trading plan?
How did your attitude change?
Has it changed again since the turn around?

Those are great questions, especially on a day like this when I'm experiencing some pretty rough sledding (shorts getting stopped out left and right). I'll try to tackle this issues one by one:

  • Psychology Needed to Turn the Corner: I've spoken many times about need to be relatively numb about gains and losses, but let's face it, we're all human. We're not going to be totally numb. Of course it feels good to make money, and of course is stings to lose money. But the more objective we can be, the better. Sustained downturns are psychologically really unsettling. Just think about what one is going through: your confidence in your abilities is damaged; you are probably suffering embarassment in front of family (or clients!) at the downturn; and it's very easy to extrapolate the losses continuing, which puts devastation plainly on the horizon. That's a very tough place to be in one's mind! For me, the key is to get one's confidence back. If you are down on yourself and running scared, it's only going to cause mistakes. If you are doing poorly, it makes sense to scale back – - maybe even way back – - and, with great care and thoughtfulness, trade lightly until you get some wins under your belt. You need to reassure yourself that, yes, you can make money in the market, you can act rationally, and, simply stated, you are not all-thumbs as a trader.
  • Change in Trading Plan: The cruel irony of the above is that, by scaling way back, you are far less exposed to the market, and oftentimes it is at these instances when the market actually turns in your favor! Let's take last year as an example: from May 15 through July 15, the market went pretty much straight down. Did I, as a bear, make a lot of money during this time? No, not particularly. And the reason is that I had become far more conservative with my bearish stance since I had suffered so horribly from mid-March through mid-May. Was it a mistake for me to get more conservative? I don't think so, and the "money left on the table" is only visible in hindsight. This period of time was critical for me to gain my confidence back as a trader, and I had a string of successful months under my belt by late summer so that I could really rock 'n' roll for the September/October downturn.
  • Attitude Change: I think the emotion that I felt most was frustration and exasperation, and those can be poisonous to a trader, which is why I keep coming back to getting one's confidence back. Take this week for example. Monday was a sensational day for me. My analysis very clearly pointed to a tumble, and I took advantage of it. Yesterday and today, however, have stunk for me, because I am tilted so heavily bearish, that even a couple of relatively modest "up" days can do some real damage. What do I do during times like this? The principal thing is something I don't have to "do" at all, which is let me stops take care of themselves (and, believe me, they've been doing that today!) The other thing I do is back off and give myself time to reassess. No matter how good the charts may look, if I'm suffering a drawdown, something is wrong, and it's not the time to be aggressive.

I hope this has been helpful.

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