Home > stocks > Seven Steps to Getting Out of a Trading Slump

Seven Steps to Getting Out of a Trading Slump

This post started out as a response to @ppearlman’s Market Shrinkology Mail Bag, and thought it would make a great full post on my own trading blog. I can very much relate to the gentleman who reported having trouble sticking to his stops. As I made very public on the stream during the month of February and early March, I suffered from the same “can’t stick to stops syndrome”. A large part of this, after deep reflection and deep realized losses, truly is the result of an ego built up during the prior months of a major bull market.

I reached out to MANY of the best traders on the stream for their advice, and they were kind enough to give me advice. There are many individuals that have reached out to me on the stream, and some very special individuals who had extremely professional and helpful advice. I really hope you follow them. They all have their own styles and bring something special to the table: @chessnwine @stocksage1 @zortrades @jfahmy @traderstewie @traderflorida @1nvestor @fibline @stevenplace

Having some non-professional trading buddies helps as well. You can bounce ideas off each other and keep each other in check without annoying the pros with your requests “for help”. For that, I can’t thank @seldomawake @caribbeanlink and @jimcollins enough.

After a *lot* of reflection, I came up with a new set of rules. I’d like to pay it forward.
The past few weeks have seen a tough set of ups and downs, a surprise US debt downgrade, serious shakeouts and strong reversals, but I have personally experienced my best personal performance this year after enacting these rules.

Please don’t simply take my ideas and write them down. Make your own ideas by borrowing some from me, some from others, create your own and then OWN all of the ideas. It is only then that you will truly break your own slump.

1) wipe the slate clean COMPLETELY. Start over. Your portfolio is probably full of some winners but mostly losers, or trades you got into for the WRONG or unclear reasons.

2) Start a trading journal. Write down your plan and hold yourself accountable. Nobody is going to change you. You have to change yourself. There are no do-overs, and there are no second chances in the market. Just a new day, a new plan. You must treat the market with respect and professionalism, or it will swallow you whole.

3) Even if you THINK you have found the bottom or the absolute SURE THING, you haven’t. Do NOT pile into a trade with everything you have because you think you found the holy grail. Never think you’re smarter than the market. Nobody can time the market consistently *every single time*. You might start to feel this way after a series of good trades, but this can quickly turn into one of the worst trading slumps of your life. This can lead to #4…

4) NEVER revenge trade. If you entered a trade and your plan starts going wrong, do NOT double down on it, or worse triple down because you know it will turn around on you. TAKE THE LOSS you had in mind when you entered the trade. Say you plan to risk $500 on your trade. If it goes against you by that much, you’re out. PERIOD. Either your entry price or your timing was wrong. You can always get back in. Human beings are inherently loss averse, but this is a dangerous mentality for a trader. A trader must be able to take small losses in order to let the big wins, when they do come, finally run. Think about it for a minute: why hold onto a losing position just because you think you’re right, when you can _really_ be right on a better trade? To hold onto a losing trade is implicitly saying you can’t make more money elsewhere. That’s just poor psychology.

5) This is similar to #3, but really hammers in the point that POSITION SIZE IS KEY. If you’re finding yourself losing sleep over a certain position in your portfolio, or having to check your position with every tick, chances are the position is too large. Sure, it’s fun to think that you’re going to score big on some cheap rare earth stock that’s sure to be a buyout target in the future for only $13/share. Just think… If I had bought ten thousand shares on margin of $REE at 10, I’d have made more than some people make in a year! But wait… that sort of leverage or position size works against you just as fast when it doesn’t pan out.

6) This is a continuation of #5… If you’re not using leverage or going “all in”, you could still be risking too much as a percentage of your portfolio size. Do not let one position take more than 10% of your portfolio. After all, stocks are nothing more than pieces of paper with a number attached to them. You don’t need all of your eggs in someone else’s basket. A report could come out tomorrow that halts trading on a security, wiping out all or most of your investment. Realize that every trade you make could theoretically go against you completely. The chances of loss are real. The market owes you nothing. Sometimes the market starts to price these things in, and sometimes it doesn’t. When the market knows something you don’t know, it often goes down and goes down fast. Trust ONLY your stops. Allow your position size to be large enough so that it keeps you interested but not so large that every down day in the market shakes you out. Know the ATR, Average True Range of the stock you are holding. Know the 20 day moving average, 50 day moving average and 100 day MA. Use these indicators to help guide when you buy, hold and NEVER hold under certain situations.

7) If you’re only taking the trades of others and not doing your own homework, you’re not treating this business serious enough. You must create your own charts, do your own research and have specific entries AND exits in mind. If you do find that really good trade, pounce on it and ride it till it stops moving. But don’t stop your homework there. Peel some off and ride the rest, sell calls against part of your postion, but don’t let it get imbalanced. Position size remains key. Don’t get shaken out when it doesn’t make sense to bail, but listen to the market. It knows more than you do.

Trade ’em well.

Categories: stocks
  1. StockSage
    April 22, 2011 at 5:07 am

    Great post Dan! Stick to these rules and you will be well ahead of the game.

  2. April 22, 2011 at 7:04 am

    good stuff. Thnx for the mention too!


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