Trading the market is all about outcomes, and it’s no surprise that we are driven to win every single day. When you’re plugging along and banking some nice wins, all is right with the world. You feel great. You believe in your skills. Your mindset is in a healthy place. The psychology of trading is on your side.
We have all been in a trading slump, sometimes thinking that trading each day is a nightmare that will never end. I've been there, recently in fact. It was at a certain moment of self-actualization that I needed to take a step back and think it all through. I was never contemplating giving up on the job I truly love, rather I needed to re-calibrate my engines, alter my approach and just get on with it.
However, when results are not positive and you lose money on trades and hurt your portfolio, self-doubt starts to creep into your mind. If you're stuck in a trading slump, you'll start to wonder if you'll ever make a winning trade again. This is crippling to your mind and will often lead to inaction at precisely the wrong time. Of course, the odds are in your favor that you will start winning again, but your mind can take you to the most irrational places. It is very likely that not one positive thought will enter your mind.
When you’re stuck in a trading slump, it’s time to do something different. Below are some tactics you can use based on the psychology of trading. They will help quiet your mind and get the ship turned around.
Examine what you’re doing right – and wrong
Self-awareness exercises are a good place to start when you need to break a trading slump. When you’re on a losing streak, your results and account balance will reflect it. Take a moment to understand what is happening and why you are trading the way you are.
I will often look back at recent trades – both wins and losses – to see if there is a pattern. I will use my trading journal, the most valuable tool in my toolkit, to search for clues. Why am I trading poorly? Were market conditions bad? Should I have been quicker on the trigger? Was I trading too much? This self-analysis helps me address any issues and write down corrective steps.
You can go through this exercise when you’re on a winning streak, too, so you can better understand why you’re winning.
Take a timeout
When I’m in a trading slump, I will often take a break from trading. Stepping away is a nice timeout that allows me to reset my mind. Although I may miss trading opportunities during that break, it doesn’t matter. A losing mentality crept into my mind, and it needs to be reversed. Banking one winner may help put me in the right mindset, but I have found that a timeout works much better.
Practice is one of the best way to build confidence. Don’t practice with “real” trades, though. Instead, trade on paper. As you rack up a few wins, you will build confidence. If you lose, look at the notes in your trading journal and think about ways to overhaul your approach.
Learn something new
Read a book or article that has been sitting on your desk. Look through charts to determine scenarios, patterns, trends and direction. While paper trading, explore new trading strategies, like a strangle, butterfly or selling a bull put spread. If you’re successful, transfer that new strategy to your back of tricks.
Talk to someone who has been there, done that
Reach out to another trader who has plowed through a losing streak. I promise you there is nothing embarrassing about it. In fact, you might find someone who is also in a slump, and you can help each other out of it! I often lend an ear to those in a short-term slump, and sometimes a brief chat is enough to lift their boat. Honestly, we have ALL been there. As traders, we are in the same position to win, but sometimes we lose, and there is no shame in losing. Just don’t keep the anxiety you’re feeling inside or things could get worse.
Remember: Trading and investing is not a life-or-death situation – even though sometimes we give it that much weight. Push through it. Rebuild your confidence. Use your knowledge around the psychology of trading to keep going. The trading slump will end, and you’ll be on a winning streak once again
We'll be covering this topic at length on my next webinar, Aug 4 after the close. Free to attend, click the link below.