What to do when the market chews you up

In recent weeks, there’s been a new addition to the Trader’s Bulletin office. This newest member of our team has on the whole had a negative effect on productivity, with her largest contribution being to chew through the internet cables.

Having a puppy in the office has its benefits though. She ensures that I keep the fire roaring in the grate all day … and she nudges me away from my screens and out into the fresh air for regular breaks.

And I can’t help but notice the similarities in dealing with a puppy and dealing with the markets – you have to be patient. You have to repeat things a lot to ensure that they work. And even when you’ve done everything right, sometimes it’ll still pee on the carpet.

Before the little brown mongrel arrived in our house, I believed that I could attend one of those training classes, and bingo – my dog would be performing tricks fit for Britain’s Got Talent.

Seems it’s not that straight forward.

I guess I was looking for the canine equivalent of a get-rich-quick scheme.

All of us want to find short cuts to building our wealth faster. But ironically, it is usually trying to cut corners that is our downfall.

The truth is that successful trading is about perseverance and patience, and lots of boring repetition.

There’s an old Japanese proverb that says: “fall down seven times but stand up eight.” And it’s good advice to traders.

So, in practical terms – what does this mean when we’re trading?

It means that we need to battle on with resilience when things go against us. In all trading, there will be losses.

But this is not the same as blindly throwing good money after bad.

How to take a loss

Taking losses is part of the life of a trader. Some of those losses will be a natural part of your strategy (no strategies win all the time). And some (especially when you’re starting out) will be due to failure to execute your trade properly.

Neither of these types of loss are the same as failing.

The first type needs to be monitored with a degree of indifference to ensure that our strategy is performing up to scratch.

The second type tells us that we haven’t yet mastered our art – we need to keep learning, keep practicing, and keep the faith.

Another trader suggested to me recently that I watch how my kids play computer games. They win and they lose. When they lose, they just start the game again and keep practicing until they get better. That’s how they develop their skills.

As traders, we also need to be prepared to win and to lose. We need to be prepared to make mistakes. We need to be prepared to lose some money while we’re learning our skills. And we need to be prepared to put in the practice.

The psychology guru Brett Steenbarger puts it like this:

Successful traders excel at pattern recognition, and only an immersion in markets over an extended time enables traders to internalize patterns and act upon them quickly.

Successful traders must also possess a reasonable degree of risk tolerance and an unusual degree of emotional resilience. Even the best traders go through losing periods. It takes a strong individual to persist in the face of risk, uncertainty, and frequent setbacks.

Perhaps one of the best ways to understand whether we’re on the right path, is to take a hard look at what the wrong path looks like.

What does trading failure look like?

Traders tend to give up for two reasons:
Trader 1: I don’t feel that I am making enough money to justify my efforts.
Trader 2: I took a bad loss that shook me up.

Both of these reasons stem from one misconception – that trading is going to be a fast and easy route to big bucks. The first trader is probably trading at sensible levels. The second wasn’t content with the returns he was getting so has upped his stakes to uncomfortable levels in the hope that he can “win big”.

The reason people “blow up” is because they feel that the profits they’re making aren’t enough – they want to make more.

The successful trader keeps chipping away at the market, slowly building their fund, and not losing their cool when the market chews their favourite shoes.

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The three stages of the trader 7 practical ways to break a negative cycle