This is part 1 of an e-book I published in 2008 about slumps. Please feel free to download and share the PDF. TraderHabitsSlumps2
Tip #1- Get Back to Basics
Tip #2- Stay Positive
Tip #3- Create Repeatable Routines
“Slumps are like soft beds, easy to get into and hard to get out of.”
Slumps are a part of trading. Really, slumps are a part of life. An athlete slumps, a sales person slumps, and just about any performance related participant is susceptible to slumps. Slumps are neither good nor bad, they are just there. That may sound weird that slumps could be good and that they are not always bad. The obvious connation of a slump is negative but it is important to re-frame it and see it as a positive and use it to your advantage. A slump is a period of time when a trader is not trading to their full potential. It may mean that they are making very little money or worst case scenario losing a lot of money.
Identifying a slump before it gets out of control is very important. A slump can last for a few days or for a few years if you have enough money and patience. A slump can get out of control if a trader forgets the basic reason for markets: INFORMATION. Every trade/market provides information regardless of the monetary outcome. Every trade is an opportunity to learn about the market, yourself and the relationship between the two. If, after completion of your trading day, you do not feel as if you learned anything you lost regardless of how much money you made and generally you lost money as well. Each trade is an audition for the next. The stakes, if you progress normally as a trader, will always get greater. Your slumps will only cost you more if you are not learning something about the market, yourself, and the relationship between the two. Use a trading journal and taking the time to make detailed notes after each trade and each day is essential. Review your notes daily. The reason for trading is to make money but that is not the only measure of productivity. Each day is different and some days only losing a little is great and other days making a lot is bad. Because this is true I use another grading scale other than money. I was given this system by a fellow trader, Andrew Darthmouth, and modified it slightly. Days are graded as followed:
A: Stuck to rules and hit profit target, B: Stuck to rules and made some money, C: Stuck to rules and lost money, D: Broke rules and hit profit target, E: Broke rules and made some money, F: Broke rules and lost money
Individual trades are graded as followed:
1: Followed pre-trade plan and exceeded profit goal, 2: Followed pre-trade plan and met profit, 3: Followed pre-trade plan and got the best outcome (could be a lost or little or no gain), 4: Followed pre-trade plan and got stopped out, 5: Had no plan or exceeded max loss.
It is important to have some measuring stick other than money, by doing so you will able to identify slumps sooner or identify slump likely behavior before it becomes an emergency.
Each person handles slumps differently, the following tips will detail ways to prevent, recognize, and get out of slumps.
Get Back to Basics
“Get the fundamentals down and the level of everything you do will rise.”
You might be surprised to hear this but trading is not complicated. It is human nature to make things complicated. There is societal importance in creating complexity, but I draw the line at food and wine. To truly appreciate something you have to understand it. Complexity in trading is like packing too many heavy suitcases for a trip across the street. You do not need them and the luggage will impede your progress. It also makes it hard to recognize what specific part of your trading is not working. Start simple and build because your fundamentals will be a safety net that you need to rely on.
I look at complexity in two ways. Complexity in what is being used for a signal and also complexity in entering and exiting trades. Complexity for signal creation has nothing to do with the amount of “indicators” or amount of chart types or timeframes. It has to do with understanding. For someone new to trading, looking at two “indicators” and two timeframes can be over whelming. For someone who has a lot of trading experience that amount of information may be nothing. Once again it has to do with understanding. It is very important to branch out and see what other schools of thought and indicators are out there. Be careful, be a master of one thing and build a strong base from there. Being complicated in an entry and exit strategy may give a trader a false sense of advantage.
If you are too complex in your entry and exit strategy you may be picking up dimes and passing up dollars. That does not mean that there is not a strategic advantage from multiple entries and exits but maybe you cannot execute it yet. I personally like to scale in and scale out but it is a skill. It is important that your strategy is not complex to be complex but because it allows you to gain some advantage and it does not become a distraction.
It is never more important to simplify things them when in a slump. It is a fine balance which should always be considered when changing anything in your trading style. If you are struggling and you have added something to your trading, it is wise to eliminate the change and revisit it later.
“Stress is nothing more than a socially acceptable form of mental illness.”
Removing anything that is not a net positive from your trading and your results will improve. It takes a lot of energy to be negative and it causes needless stress. When a negative thought enters my mind while in a trade it comes true. For example, I recently had a little bit of bad luck with getting stopped out on the low or the high of a move only to see the market go in the right direction. I entered the next trade I was trailing my stop and I actually said sarcastically “I hope this stops me out on the low tick again”. Guess what, it happened. I got stopped out on the low tick and it proceeded to rally. There is no guarantee that if you think positive, positive things are going to happen it never seems to fail if I think negative thoughts that it comes true. The negative thought was a subconscious indication at of bad stop placement. The reason it works out like that is because the energy being used to think that thought should have gone to concentrating on the trade. Irrespective of my stop being hit, the stop upon further review was not in a place where it should have been to allow me the necessary space to stay in the trade.
Having negative thoughts while trading causes unneeded stress and is not productive. Adding stress to an already stressful situation will eventually affect your performance. Let me clear something up about stress and performance. While watching a sporting event, it is common for an announcer to say someone is good under pressure. Intuitively, that makes sense but as a former athlete there is no stress in shooting a free throw with the game on the line. It is something that has been done 1000’s of times and the gravity of the situation, if focused enough, will never come to the surface at that time. The stress happens when you start to think negative thoughts or away from the process. If you ask anyone who has ever missed a free throw or a field goal to win the game, if they are honest with themselves they will tell you it is because they focused on the negative. If the shooter or kicker had just focused on their fundamentals (safety net) then, assuming it was within their ability they would have succeeded. There are two types of negative thoughts that I stay away from. As mentioned above, I stay away from focusing on the worst thing that can happen. Having that thought is bound to be a self-fulfilling prophecy. Often by expecting a trade to be a losing trade or at least not capturing the full potential with your rules, it will happen. The other thought I stay away from is, thinking “What if I am not in the trade when it hits my target?” That does not seem to be really negative but it has a negative effect. If the market is only giving me a certain amount then I can take it or it can take me. There is something to be said about sticking to your exits but, when I start to worry about not being in a trade “IF” it gets there then I am sure to lose a lot of open profit. This thought often happens when I am down money so be aware of it.
I mentioned removing anything that is not a net positive from my trading. I sometimes say four letter words that should not be repeated or maybe complain if something unlucky, happens to me. I use that opportunity to vent and it helps me to forget about it and move on. In a perfect world I would have no reaction to a situation like that but I do. If that is not possible for you have a technique to forget it. I scream or yell or complain and although I should not be in that situation, until I am not I will continue to use that technique. Be very careful not to believe yourself.
Staying positive can be challenging when things do not seem to be going your way but it is worth the effort to do so. Be conscious of your thoughts because they will and do show up in your trading. Staying positive will reduce your stress and will ultimately improve your trading, at least it cannot hurt.
Create a Repeatable Routine
“Bad habits are like chains that are too light to feel until they are too heavy to carry.”
Creating a routine is important for two reasons. Establishing a routine to get in a rhythm. It may appear that because rhythm cannot not be quantified that it does not exist. It certainly does and establishing a rhythm is the first step to getting into the coveted “zone”. There are very few constants in trading but your routine can be one of them. In athletics they are called superstitions but it is about a routine. If you watch someone shoot a free throw or watch a professional putt they do the exact same thing everything. The second reason to have a routine is to remove the focus on the outcome which has a tendency to drift negative. Shooting a free throw, hitting a shot or taking a trade are all things that require fundamentals and can be repeatable.
My routine is in two parts, before and after the trading day and while in a trade. I use my pre-market routine to try to get in step with the market. My routine is basically looking over charts, checking news, identify important levels, determining if the longer term picture changed and I take 5-10 minutes to myself to really get focused. Those steps allow me to map out my plan if the market reaches certain levels and I have already imagined myself in those situations and executing properly. After the completion of the trading day, I look at each of my trades individually and then as a whole. I use the grading system I previously mentioned. I look back at the charts and make the necessary adjustments for the next day. After I am done with that I am done thinking about that day. It is important; you have to leave the day at that day. You cannot do anything about it, if it was bad or if it was good who cares because they can take it all back tomorrow. Your pre and post trading routine must not take a lot of effort or it will become a distraction or a chore and you will not follow through so keep it simple.
While in a trade or looking for a trade, I ask myself a few questions. For example, is this a counter trend trade or trend trade? I ask myself these questions, because it starts the process for being able to react and not make a decision as the market moves. If I am thinking when I need to act, it is too late. Very few people can control the market but we all have control of what the market does to us. While actually in the trade, I am focused on the positive and exits but am not over confident. I concentrate on my breathing and take deep breathes. After the completion of the trade I always say no matter the outcome, “OK, time to the look for the next trade.” I also will write little notes on the trade.
By creating a routine, it helps to get in a rhythm and changes the focus away from outcomes. I also use my in trade routine to help with stress and to individually plan each trade as it approaches. While in a slump it is so important to regain rhythm and reduce stress. My pre and post trade routine helps me to get in a rhythm but it also gives me confidence to move forward each day. By examining each day I can make the plans for that day and see how I did with those plans and make any changes that are necessary. It is important to remember to not make a complicated routine or it will defeat the purpose. I find when I am in a slump that I had gotten away from my routine.
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