Failure to make money from financial markets can take many forms. I knew that trading with money you cannot afford to lose can be a contributing factor to failure. When I began trading, I did not realise that some failures can be psychological.
This post is a brutally honest tale about how I overcame a major hurdle to successful stock market trading.
But before that, we need to go back awhile to set this story in context.
In the wilderness
I had been trading for roughly 6 months. I had at the time:
- A trading plan
- Trading experience
- Lots of knowledge
- My own trading capital
- A trading diary
I looked at the capital left in my spread betting account and the numbers did not look good. My long suffering wife had had enough as well. She came home from work one day, took one look at my face and said “how much have you lost?”. “50% over the last 6 months” I replied. “I’m just no good as a trader and now I’ve lost loads of money. I’ve honed my trading plan. I’ve spent countless hours researching risk management techniques. I’ve analysed my mistakes over and over again. We are in a strong bull market and I still can’t make a dime”. “Pull yourself together man” she said and she was absolutely right. I did need to pull myself together.
The defeatist negative self talk had to stop, which is when it dawned on me that it was me, and not the trading plan that was flawed.
You see, I had been complaining to her that I had researched everything a trader needed to research before even risking a penny on the stock markets; I had traded virtual accounts and made money; I had figured out which indicators worked for me and which did not (all of them except simple moving averages); I had figured out which markets to trade and when to trade them (UK shares, end of day).
I looked back over my trading diary and saw that I had entered and exited trades to the letter of the trading plan, without deviation. I compared the notes I had made at the time of each trade with the entry and exit rules of my plan and they matched. I remember thinking, ‘there must be something else wrong here’. I spent an entire week forensically looking over my trades, trying to look for the reasons for my failure. Still nothing.
A massive Google research project ensued which eventually led directly to Brett Steenbarger’s A Trader’s Self-Evaluation Checklist. This and other articles by Steenbarger literally changed the way I viewed trading financial markets forever. Time does not permit me to go through Steenbarger’s articles although I would suggest that you print them out and read them for yourself. Of particular note is the first few paragraphs of A Lesson in Trading Psychology. This was one of the first places that I came across the idea that trading losses are tuition fees. In other words, losses should be viewed as payments for information about the stock market instead of money that the stock market has ‘relieved’ you of.
The list of articles on Steenbarger’s website is nothing short of a goldmine for new traders. The Personality Questionnaire for Traders is an excellent self evaluation exercise. My suggestion for traders who are losing money is to stop your trading and have a look at the three articles mentioned above. The results may not be what you want to hear. They may even turn out to be ugly. But you can at least find out what your state of mind is when you are trading and then put right anything that needs fixing.
I realised that it was how I viewed the stock market that was preventing me from being a successful trader. For example, I would become extremely upset, depressed even, when I sustained a string of losses because I thought a statistically significant trading system could not fail in this way: me and my trading strategy were ‘right’ and the market was ‘wrong’. I thought that the losses were evidence of the market’s ‘wrongness’ and the more losses I sustained, the more ‘wrong’ the market was. Of course this way of thinking is itself irrational because the stock market is always right, no matter how many wins or losses a trader realises.
What was strange about my previous way of thinking is that my strategy was specifically designed to sustain a high number of losses before I needed to cease trading, pause, evaluate and continue. In effect, I had engineered a risk management system that took account of my negative emotions when it came to losses by being able to take a lot of them and still be profitable. My basic problem was that I ignored this aspect of risk management. Instead of exchanging losses for information, I realised that I exchanged them for deeply negative thinking. This helped me to:
- Insert a section in my trading diary to record whether I have a positive/negative/indifferent state of mind
- View losses as information
- Determine a cut-off point to stop trading, pause, evaluate and continue
- Develop techniques to engender a positive way of thinking
- Accept that the market is always right
These became part of my trading plan and helped me to overcome failure in the stock market as a direct result; I now had a new, positive way of thinking and a way to catalogue and evaluate my new attitude towards the stock market. At a basic level, I realised that I, not the stock market needed to change if I wanted to become a successful trader.
Helping you to help yourself
I realise that this article is quite a long one and possibly should have been two separate posts, but I wanted to share with you some good resources, especially for those who are new to trading. I hope this article has helped you in some way or maybe think about how you conduct your own trading. If so, leave a comment below or share this post via your favourite social media.
The Simple Trader