AW Sir,
In one of your posts on this Forum, you had mentioned that
in your early days, your biggest losses came after a streak of biggest winners.
I am also in a very similar situation as you were. This has happened with me numerous times. I have also observed that this happens because of
my ego, which tends to creep in once every month or two, but this time it crept in twice during the same month
. Otherwise, I have good consistency and don't mind cutting the position in a loss.
I have tried reducing the position size after a streak of winners, but this didn't help much, as, when I reverted back to normal size, the losers started burning a hole in my account.
I have also tried giving a break to Trading. This has always been a saviour, but I require a very long break, around 2 to 4 weeks.
I would request you to please share your experience in this regard and what were the steps that you took to correct this. Please take your own time, no hurry!!!
PS: I know this is a Thread on Options and probably not the best place for this query. But I did not want to take this over PM, as some one else might also be going through this peculiarity and your response would be helpful for others too.
Regards,
Aditya
Aditya, that is one of the most challenging and frustrating situation for a trader who is at level 2 or level 3 of growth path (level 1 being novice). Believe me, you are not alone who has faced this in recent high volatile moves of global market. Such volatility gives us great profit and pushes us in overconfidence zone and in next few trades market slaps back on us.
I came across an article on similar topic. So let me share the extract from that here. Following is the typical cycle of performance in professional field. (Guess what phase our cricket team would be in currently?)
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Lets look at the four phases briefly and relate each one to a traders ongoing experience in the market.
Flow. This is probably the easiest phase to recognize. Its John Paulson in 2007 and 2008 managing a portfolio that was designed to take advantage of market conditions. Its Michael Jordan in 1989 sinking the shot over Craig Ehlo in the Eastern Conference finals. Its Tiger Woods at Augusta in the 1997 Masters or at Pebble Beach in 2000 making the best golfers in the world look insignificant for a weekend. And most importantly, its YOU taking that trade or making that investment when the idea matches the market. This is when success seems effortless.
Fall. This is toughest part of the cycle to identify as its happening. Statistically we fully expect itthe return toward the mean after a period of outperformance. The fall, however, can often be a hazy time when bits of that flow feeling still linger, but the results start to decline. We may find it easy at first to ascribe the changes to outside influences: news affecting the market or distractions affecting our performance. But as we continue to fall, we begin to realize that things arent like they were when we were in the flow. Results drop, and things dont seem easy and effortless like before. Uncertainty starts to dominate and lack of confidence begins to creep in.
Fight. Quite simply, this is when nothing seems to fitour trades dont match the market. Its when hedge fund managers invest heavily in the rebound of financial stocks and they drop lower, or portfolio managers bet on rising rates and a catastrophic drop in US Treasuries that just never seems to come. This is when a golfer cant find the fairway with his driver or the cup with his putter. This is the time when you and I fight the trend trying to pick a top or bottom for a turn. Or when we keep praying for a breakout or breakdown that seems to never come as the sideways market keeps on going.
Fume. Eventually we realize that we have been fighting against instead of flowing with. Different people react in different ways during this phase: some people withdraw, and some fight even harder for a while. While the name I chose for this phase may seem negative, it strikes me as truly necessary. We need to break our pattern of fighting. We need a time out. For those that truly recover and head back to the Flow state, this Fume phase usually ends in a cathartic moment when we realize why and how we were fighting against the markets, our natural tendencies and abilities, or our golf swing. And we free our minds once again to flow with what works.
And then, like the instructions on the shampoo bottle, we Lather, Rinse and Repeat: we go back to the Flow state and the cycle continues.
As traders and investors, we will have ups and downs. Even the great ones do. The way to spend more time in Flow phase and less time in the Fall, Fight and Fume phases is
to recognize where we are in the cycle.
Self-awareness will allow us to react quicker, break our fighting pattern, make adjustments and move back towards the Flow phase. With practice, we can reduce our cycle time and spend more time flowing with the markets and enjoying our trading and investment activities and results.
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Certain action that I took to fight this trading state were (take them as pointer and find out what works for you cause this topic is more related to our trading psychology)
- finding out what performance level is my abnormal level. That is when I was most vulnerable. eg - If I make 30 to 40 points a day, then making 150 on a day can easily throw me in this spot. This is where I need to become more careful. Similarly if I make 5 /10 points for 3 consecutive days then I need to watch-out.
- Adjust my position sizing and risk management strategies for this. i.e. reduce the size and risk. It is very similar to situation when I am going thru a drawdown. In drawdown phase, all kind of wrong trading behavior (eg overtrading, higher position size, wider stop, hope, taking small deviation from our proven rules etc) come out and we need to have our plan in place to handle it.
- Reinforce right trading affirmations to keep me on the ground. Like - Each trade is just another trade. Outcome of last trade has no impact on next trade etc. Yes we know all these statements pretty well, but reality is we forget them when we need them most.
- Start focusing on bigger picture and let it assist our short term trading.
Such wide moves are result of movement from biggies, so when they are aggressive in the market, we need to see the charts that those guys are trading. Weekly moves in the range of 2 to 2.75 standard deviation range is abnormal by any standard.
- Taking a break or getting into paper trade mode.
(In hindsight, I wouldn't suggest to take a break. We don't get this type of volatile market very often. We need to learn how to benefit from it and at the same time, how not to give it back. The way trading is changing, we are going to see more and more of such volatile action. So why not face the tide and enjoy surfing it. We might fall few times but as long as we control the damage, we will learn how to ride it.)
Hope this helps.
I am sure you will also come back to your
flow state soon. Take this opportunity to learn from this recovery. We are in bear market, recession and the rule of trading are different here from the bull market trading.
All the best.
