Jeff White of TheStockBandit.net, a popular speaker at the Traders Expo, explains how you can overcome doubt in your trading, especially after a significant loss.
Traders have to go through recovery on almost an ongoing basis. Sometimes it's from a paper-cut-sized hit to the account, while other times it involves coming back from an amputation of sorts-whether it be a major drawdown to actual or emotional capital.
Either way, without the ability to recover, you're done. (Obvious alert: that's no place to be.)
There are steps to recovery which should be taken, and I want to discuss some of them. By no means is this an exhaustive list, so please add your own in the comments, but here are a few which I think are necessary on the (sometimes long) road back. Then we will discuss how to overcome the doubt and indecision that inevitably results from a bad trade.
- Admit it. Face up to what it is. Call it a slump, call it
shattered confidence, call it a big scary market monster. Whatever "it" is,
you have to get it on the table so you can deal with it.
- Seek help. Maybe you shouldn't go it alone. Without some
accountability, it's easy to relapse. Find a mentor or some coaching to get
you back on track, and add some skills to your repertoire. The fact of the
matter is that left to your own abilities as they currently stand, you may
very well be facing a similar situation again.
- Take inventory. Take an inventory of what's left of your
capital, both in terms of cash and confidence. It may be that you simply don't
have enough left to consider a comeback right away, so perhaps you incubate
for a while and prepare in other ways for your eventual return. Or perhaps you
assess your situation and realize you have more than enough to start the
process.
- Get uncomfortably familiar with the cause. What was it
that put you in need of recovery to begin with? Overconfidence? Lack of
respect for the market? A series of small mistakes which compounded your
problems? Understanding the root cause of your wounds, even if painful, will
help you prevent it from happening again in the future. After all, you've
already paid the tuition, you might as well get the lesson.
- Get back in the saddle. The last step in the sequence is
to return to trading and begin rebuilding. Start thinking about what that's
going to look like for you and how you'll avoid the same pitfalls which got
you this time around. Visualize yourself back in the routine again, making
plays, staying disciplined, and having success.
Having covered some of the steps necessary to recover from deep trading wounds and what it involves to start moving past the pain and toward progress again, let's talk about removing the doubt that can affect your future trading decisions.
Taking a big hit in your trading often sidelines you, either literally or (even worse) mentally. I know from experience! And while there are times to take a break in order to avoid doing further damage, at some point you still have to get back on the horse and overcome those doubts.
But how do you go about doing that? When your account and confidence have taken a sizable reduction, there's a ton of doubt to get past, so let's look at five ways to do that.
- Take it down a notch. And you know exactly what I mean.
When you're starting out or starting over, you have to start small. Small
enough that it's all about the process and not the result. By doing this,
you're setting the tone for growth again, you're respecting the market, and
each trade takes on minimal significance while you're getting back into the
right habits.
- Get specific. By narrowing your focus to that which you
should be doing, by default you can eliminate much of the fear you may be
facing, as well as a lot of the trouble which comes with a
fly-by-the-seat-of-your-pants style of trading. Without a game plan, you're
playing the guessing game. Understand which conditions you're facing, and go
with the strategy best-suited for those conditions.
- Set realistic expectations. As much as you might like to,
don't expect to make it back right away. Big expectations may be what got you
in trouble to begin with, so curb your enthusiasm a bit and aim to just get
the bat on the ball first. The idea is to start a foundation which can support
bigger and better results, but right now it's first things first, so look to
start small.
- Keep risk in check. As noted in the point above, you
can't just go swinging for the fences. To avoid that, have a "risk per trade"
amount that's appropriate for the fresh start you're making. And be careful
with how many positions you'll carry at once, at least until you're back in
the flow.
- Hit singles. Early on, the aim is to get on base and establish a rhythm of success that can be built on. By selecting high-probability setups with defined risk, you'll increase your odds of getting into that rhythm and start marking some results in the black-just what you need the most.
Jeff White can be found at TheStockBandit.net.
