Thought Patterns & Handling a Trading Downturn

Psychology is a huge part of trading as it is in any performance endeavour. Your frame of mind when trading will have direct implications on your actions and therefore your pnl (profit a’n’d loss). A destructive thought pattern will lead to poor trading feedback through the pnl, which results in a negative feedback loop into your emotions and back into your trading actions, a cycle that can be very difficult to stop.

It can sometimes be quite difficult to determine when you might start to slip into this negative feedback loop but quite often the sequence experienced by traders tends to be the same. Every trader finds that when trading is going well the confidence builds and despite the best intentions not to let it happen, the ego starts to expand.

As with any profession, trading becomes your identity, “I’m a doctor”, “I’m an accountant”, “I’m a futures trader”. But with success your ego starts to slip in too, no longer just “I’m a trader” but now “I’m an X lot trader” or “I’m the largest trader in my peer group.” Your targets have been increasing and the size you place on each trade increases accordingly – which is great and all part of the masterplan for your trading career. However, when the market changes and cycles as it inevitably does and your profitable edge no longer holds true like it used to, many traders find it very difficult to become instantly humble, cut their size and go through the learning experience all over again.  Working on a new edge and refining it enough to be exploited with size and a decent level of confidence can be quite time consuming.

When the losing days begin to appear traders can take it subconsciously as a very personal attack on their identity, without consciously realising they are taking it as an insult to their ego. The first signs are when the emotional battle within begins to escalate both at and away from your place of trading. You may find yourself doubting your ability, you may find yourself feeling out how other traders are doing, more than you cared to before. Alternatively you may start hiding away from socialising with other traders because you don’t want to have to address the change in your trading performance, either just in your own thoughts when hearing others talk about the market and their trading, or god forbid someone innocently asks you how you’re finding the market!

Just like a strange sound in your car, or something to do with your health, you know it’s going to be uncomfortable and a lot of effort to get it checked out but you know deep down that if you ignore it the final bill may be many multiples of the price of an early fix.

Being able to identify when you start to experience this cycle (every trader without exception does) and address it, can be a great advantage for a trader. Saying, “I don’t have an ego” is highly likely to be untrue and just another start on the road to denial. It’s far better to say yes I do have an element of ego like any normal human and I must keep an eye on how it is being influenced by my trading. Is it growing to the point that it is affecting my decisions? You may see it emerging as you holding losers longer than you used to because you think you know the market inside out, or you may find yourself averaging when you never used to, because you’re still right.

Perhaps you might find you experience negative thoughts or shout them out loud, “This is impossible!” “What’s the point?,” “This is like trying to get blood out of a stone” etc. It’s paramount that along with humbleness regarding size and discipline on exiting poor trades (which will do great favours with regards to money management and mitigating drawdowns on your hard earned account), that you maintain a positive attitude during this difficult time. You should be asking yourself constructive questions such as, “Which elements am I getting right?” – perhaps you are reading the market well technically but you just get squeezed. Ask yourself “What can I do to benefit from this repeating pattern that costs me money?”, “How can I turn around my disadvantage here to my advantage?” If your target seems overwhelming during this period, cut it into hourly sized chunks to make it less daunting.

Perhaps most importantly you need to analyse what state of emotion you are in. Try to imagine standing behind or beside yourself and criticise your body language, your posture, your comments and style of trading that day, to ask yourself, “Am I’m really benefiting myself trading in this state or putting my long term goals at a disadvantage?” If the latter then step away and take action to alter your mood, you’ll thank yourself later on.

At the end of the day concentrate on what you did right, the trades you were proud of and say to yourself, “I need to do more of those kinds of trades.” You will find this far more beneficial than coming into work the next day thinking, “I really need to avoid losses like yesterday and bad trades like yesterday” – if you focus on downside you will be drawn towards it. Anyone who has seen police videos of cars stopped on the side of a busy road being crashed into for apparently no reason, will realise that people tend focus on something so hard that they subconsciously head straight for it, when in their mind all they are thinking is, “I need to avoid that”.

If you work on these elements of self management you will find that you will enjoy the process of fixing these issues early on, your account won’t suffer and you confidence won’t suffer. Keep an eye on the ego and focus on the long term aim of your trading career. Two weeks of focusing on a new strategy on small size will cost you far less than saying, “I can’t cut my size anymore, it’s already a third of what I used to do” until the size is taken away from you due to shrinking account size and you finally kick yourself for being so stubborn. Catch it early and take steps to control it before it gets out of control.

Finally don’t over-analyse your trades and don’t hold stubborn opinions to your detriment. Try and align yourself with the flow of the market, swim with the current but be open to change. As Funakoshi Fumio say in the film Fist of Legend –

“If you learn to be fluid, to adapt…you will be unbeatable.”

Of course Trader Talent has all sorts of tools to help you mitigate your risk including news services and squawks to indicators, but it really comes down to you in the end, wherever you decide to trade.

Last updated June 3rd 2024.