Trader's Edge - RESIGNATION

As we continue our series of posts on honing our psychological edge in trading, the next emotion on the docket is Resignation. When a trader reaches such a point of despair as to "throw in the towel" they are there. When one is resigned to losing, they've probably gone through most of the emotions (and signs along the way) related to Fear already.


I'd like to say this is rare, but in the past 18 months, if you've been involved in trading - even in the slightest sense - you probably know people who have hit this level of grief. Lots of people lost a lot of money last year, and many took on this characteristic in an act of desperation. Here are a few thought patterns that might be warning signs:

• "I'm down huge... I don't have much else to lose." This kind of internal dialogue is a desperate attempt to regain big losses. It's a gambler's thought pattern. Unfortunately it causes the trader to ignore position sizing rules and take unwarranted risk. This is what we often call trading to get even... and it's a bad idea.
• "I've been losing... I need to change my trading plan." Well, maybe you do, maybe you don't. A few losses, cause Fear. Fear ultimately leads to Resignation if left unchecked. Changing trading strategies in the heat of battle is another act of desperation that will frequently do more harm than good.
• "I give up". Big losses can sometimes lead a trader to simply decide that this business isn't for them. That may actually be the best thing a person could do. It's unfortunate that it gets to that point for many people, but if it's not working (and sometimes it just doesn't) quitting - at least for a while - may be an excellent idea. Even if not permanently, taking a long break is sometimes wise. It allows one to regroup emotionally, evaluate strategies, evaluate the trading plan, and make some new decisions about the business.

What to do: Resignation is normally a response to long and/or extensive losses. The very best bit of direction I can give is to closely monitor position sizing. Going too big on positions is what causes big losses. For example, if no single position can cause more than a 1% drawdown in your portfolio there is little likelihood that a single trade, or even a bad day for a group of trades, would trigger this emotional state.

You might also consider maximum loss rules for your trades, AND for your portfolio. In my research I have noticed that great traders seem to hold up okay with drawdowns under 3-4%. When they get bigger than that unnatural things start to happen. With that in mind I have some max loss rules for my overall account for a given month. I also have a ladder approach that allows bigger position sizing only after a period of success. If I have extensive or prolonged losses, I move down the position sizing ladder.

Overall, position sizing is both the remedy and the prevention to triggering this desperate emotional state. Pay close attention to it.

Good Trading...