I have been trading for approx. 1 year. I have learned lots and love trading stocks but i have a very very serious problem. Most of the time i make money on a regular basis. The problem is every so often i get wired into a trade. What i mean is i buy lets say 1000 shares of abc. The stock drops real quick when i anticipated it going up. Immediately i am down 6 or 7 hundred in the trade. Some of the time when something like this happens i refuse to sell and actually add to the loser. My loss grows rapidly now and i may be down 3 grand. Many times i buy even more and sometimes the loss continues to grow to mass proportions. Finally my loss could be as big as 5 digits (massive when on an average day i make 500). The loss knocks the shit out of me financially and psychologically. How do i respond. I literally smack myself in the head a couple times after the trading day is over. Then i think about what i did and try to learn from it. I then determine to trade smarter and tougher than ever. For the next while i trade great making between 300- 1000 a day for a while. Then out of the blue i seem to find myself with way to many shares of something again. I am now in another losing position with the same cycle starting all over again. I refuse to sell, i say the specialist is just trying to shake me so i buy more. Before i know what happened im down 7 grand and i realize it will take a month of great trading to get back what i pissed away in the last 2 hours. My problem is terrible discipline skills, but i am having trouble correcting this problem. The bigger problem now is that it is starting to happen more frequently. I am still up cash for the year on the whole but i know i will go broke if i cannot cure this pattern. It is only a matter of time. It frustrates the heck out of me because i feel i have other skills that are really really good compared to the average trader. But my ability to pick nice winners or my ability to read the tape means shit if i cannot cure my discipline problem. If anyone has any advice it would be so much appreciated. In my early years i use to gamble on sports casino horses etc.... Is this why i do what i do? I know my problem can be cured, and i feel on a conscious level i can be ok, but to change subconsciously is the key. Should i read a certain book? Any replies much much appreciated.
You have described a very common problem that I am sure almost all of the traders have dealt/dealing/will deal with. That was a BIG problem for me last month that cost me 1/2 of that month. These are my suggestions (using them I saved my financial and psychological ass MANY times, including once this Friday). Losses are an essential part of trading. If you think that you can trade without losses you should choose another carreer. Once you're past that, there is hope left for you. Your losses that blow out of proportion are a cause of a psychological problem, and not a problem of your trading system (if you use one). I will try to dissect your problem for you, so you can learn from it. There is one very common sense concept about trading (that a lot of people miss) that is the cornerstone of this philosophy. If you are competent to be a trader of any kind you will have winning trades (based on your skill) and you will have loosing trades. To become a very successful trader, you need to manage your losses. A lot of people on this board talk about the loosing streaks and how to deal with them. I think that a bigger problem is how to deal with winning streaks. Besides all the good that a winning streak will bring you, it will also bring you something bad: too much confidence. You may get the impression that you are invincible and that EVERY trade will be a positive one (or a variation of that). That is why you will hold your next loss. What is worse, is that when you first hold your loss past a reasonable level (growing out of proportion) and then miraculously turns into a win. That only reenforces your belief in your invincibility, causing your next loosing trade to exponentially increase and possibly wipe you out. Whenever you are in a loosing trade remember: 1. Sometimes the market is illogical and insane, and it can remain that way longer than you can remain in the market. 2. If you compare your holding losses that turn out to be winners VS. holding losses that come out to be heart-brakers you will see that the heartbrakers outweigh by several significant figures. 3. It is better to cut your loss immediatelly, and go on the opposite side of your trade than to remain married to your trade. Once you get out of a loosing trade, and it goes down more (supposingly you were long), for your psychological health, think what you COULD have lost and would have lost (for me 1 month ago), for you yesterday, or whenever. You will then take your losses with pride and laugh. I only lost 100 bucks instead of 10,000. Try to think in loss avoidance as gains. You already have a precedent. I.E. You are long 1000 shares of ABC. It goes down half a point, and you exit. You loose 500 and you're done. The stock tanks 5 points. If you were trading like you were before, you would have lost 5,000. You just saved yourself 4,500. Think of that 4,500 as a GAIN. Also, while trading, try to remain SANE and reasonable.
If you move 1000 shares in a stock and you are down almost 500-700 instantly, you need to work on your entry. Sounds like you are getting sucked into the trade before the signals develope for a true entry point. Are you trying to catch bottoms? Sure sounds like it. You would be better off to watch and wait. Allow the trade to develope. When the masses start buying and it appears there is strong support for a move jump in. Trade 500 shares, then another 500 as soon as you've confirmed that you made a valid trade. Or you can throw 1000 and pull 1/2 out at first sign of weakness when you have a gain and see if a second and third gain will develope. Of course gradually move your stop. Sometimes its better to buy into strength and sell into strength. Do not try to preempt the move, you will just allow others to bail on a bad trade using your money.
The common trait among successful traders is that they truly believe and accept that they have no idea what a stock or the market is going to do. They can quote probabilities and make educated guesses and have conviction, but they realize that nobody knows what is going to happen. To a successful trader a loss is no different than a gain in the sense that they are all just numbers that go into the mix that makes up the expectancy of their system. Maybe you felt quite confident when entering a trade and you were shocked at how quickly you were proven wrong. But it shouldn't matter, because when you are entering the trade you should be comfortable with the idea that it's quite possible that you will be wrong. You have to accept that as part of your belief system about the markets. In your examples, it sounds like the thought of being wrong was far from your mind and wasn't really considered. So when it happened, you were like a fish out of water. And of course you must establish a stop price before entering the trade, but that should go without saying. One book I highly recommend you read is Trading in the Zone by Mark Douglas. It deals with these issues very well.
I think we have probably all done this to some extent at one time or another. We also probably all know trader(s) who have put themselves out of business this way. I know I do, and more than 1. So far you have gotten good advice here that will help you. A few other ideas, FWIW: * Don't know if this is true, but I have heard from a prop firm owner that the #1 reason traders blow out their accounts is because they add to losers. Don't let this happen to you. * Some traders will add to a loser only once, and if it continues the wrong way, close out the trade. * If your trade goes immediately against you, take the quick loss, and if you still think your original trade was correct, you can then enter at a better price. * Pick a stop loss amount, at least to have in your head. Maybe 2% of your capital. Then stick to it, and don't be stubborn. * A statistic from Humphrey Neill's Tape Reading book is that when a trade starts in the red, only 1 in 4 times does it come out. Don't know if this still applies today, but worth considering. Sounds like you can make money consistently if you can learn to stop this pattern. Try to find a way to FORCE yourself to do it initially, until it becomes second nature. Good luck, and good trading...
if you had only done this once i'd say never do it again and learn from the mistake. since you've done this more than once start looking for a job because you'll go bust in the very near future. because of your problem you are ONE trade away from blowing out. think about that, your first trade monday morning may be your last because you'll marry it and keep thinking it'll come back.
It's very simple, GET OUT and eat the loss. You've obvously seen it happen over and over again where a 500 - 700 loss turns into over 1000+. So which way is better take the $500, and make it back in a day or two or take 5K loss andspend a month making it back. Next time your in the situation mentally or out loud say to yourself, I've seen this before, and I'd rather take this loss rather then a bigger one. Don't kick yourself if once in a awhile it does bounce back, cause you know that the majority of the time it will bite you in the ass. Another thing you should consider, a stock like ABC is very volatile and can move against you 50 - 70 cents quickly, so if you're going to trade it, you have to expect to eat a $500 loss every once in a while. Use a stop loss order not a stop limit, cause a stop limit could be blown through on a gap down or up. At a minimum if you cut the loss at $500, you can make part of it back that day, and only spend one day making it back. But constantly remind yourself of your experience with adding to the loser, and eventuallyyou should be able to accept the little loss as part of the process. Trust me on this.
Perhaps the hardest thing to get your hands around is the realization that even if you are doing everything right on the entry - that half or more of your trades will be losses or break even. There is no perfection in trading. Some people don't take their stop losses because they want every trade to succeed. The other thing to condition yourself towards is to not let the unsuccessful trades upset you. Otherwise you will hesitate or miss out on the next successful trade which will make up for your losses and give you a profit.