Trading Psyche: Persistence

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.  It’s at this point that our ability to persist is truly tested.

I'd like to say this is rare, but in the past three years, if you've been involved in trading - even in the slightest sense - you probably know people who have reached this level of grief. Even in the past couple of weeks the market has tested our resolve. Lots of people lost a lot of money last year, and many took on resignation 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 sometimes 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 and the trading plan. Changing to unplanned position size, or altering trading rules should be evaluated carefully.

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.

Unfortunately, sometimes losses happen fast.  This has been experienced by many in the past few weeks, and at other times during highly volatile market activity.  In those cases one has to make the careful decision about whether persistence is a good idea.  Evaluate your trading plan.  Evaluate your ability to remain consistent and disciplined; in other words, your ability to execute.  If your plan is solid and you believe in it, execution is all that remains.  Drawdowns happen, and the persistent execution of a winning plan will shrink them away.

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

Good Trading...