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Trader's Corner

Getting Real

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You'd have to have been in isolation for the last few years not to have picked up some Dr. Phil-isms. When researching this article, I even discovered websites that allow people sick of the pervasive Dr. Phil-isms to pretend to gun him down. I'm not going to be linking you to those.

We're going to get real in this article, a la Dr. Phil. We're not going to be talking about "name it to claim it," but we are going to apply some of his relationship advice to trading.

Your relationship to the market is likely to have been through some bad times lately. Market action has been dreadful. A slightly panicked mood has seeped out of the financial pages and into the mainstream press. "Retirement on Hold," "Struggling students turn to food banks," and "5 big losers in the banking crisis" are just a few of the headlines discovered in a cursory search of mainstream press headlines beginning a few weeks ago. Friday morning's headlines detailed unexpectedly dire news out of the U.K., news that we're not alone as our economy weakens.

Traders feel their fear levels escalate, their shoulders literally hunching as they read one dread report after another. Looking for new investments or studying new types of trades becomes overwhelming. Distrust of brokers grows.

Let's get real. Once, when Dr. Phil counseled a woman whose distrust of her husband had grown out of bounds, he told her that the person she really distrusted was herself. She distrusted her ability to exit a relationship if it were to go bad. It's the same with a trader's relationship with the markets. Maybe, if you're feeling excessive fear, what you really distrust is yourself.

More decisively, maybe it's your ability to manage the risk you're taking on. Perhaps you're taking on a manageable about of risk but you distrust your ability to manage specific trades by setting appropriate stops and heeding them. Believe me, it's not heeding those stops and taking a loss that hurts so much. That's not what engenders so much depression, fear, and distrust associated with the trading process: it's a failure to set and heed stops, letting a loss get too big, that does it.

I'm not Dr. Phil; nor do I play him online. However, I can verify from personal experience that there is nothing like the relief of taking a loss and knowing that it was merely the cost of doing business, as Mike Parnos of Couch Potato fame and others say. In the July option expiration cycle, my trading plan for managing condors actually had me exiting some positions for a small loss when it turned out I wouldn't have needed to do so after all. However, managing my trades the way I do keeps me from suffering a catastrophic loss, so I don't mind those times when I've acted according to plan and it turns out that I could have either made a higher profit or not taken a small loss. Most of the time I don't mind it. I'm human so of course I feel a pang now and then, but I certainly don't punish myself with the shoulda-woulda-coulda chant the way I once did. In fact, I was thrilled with the way my personal trading plan worked in the July cycle, because it was one of those times when a big loss could have turned into a catastrophic one.

Keeping a loss as small as possible and acting appropriately to preserve trading capital tells traders that they can trust themselves in the future. For example, while none of my written-down plans will prevent me from a bigger loss in a 1987-type scenario, years of testing my plans have proven that I can mostly trust myself to control what can be controlled. Emotion relating to trading will never go away, but it has certainly declined dramatically as a result.

If you're too fearful, you're probably taking on more risk than you can afford to lose or you distrust your ability to act appropriately to limit losses, if needed. Or both. It's time to work on yourself and your relationship to your trades.

There's help. Along with all those scary media titles, you'll find some more titles consoling and helpful. A check under the CME Group's "Psychology of Trading" webinars includes titles such as "Truth about Impulse Trades," "Win the Emotional Trading War," and "Handling Exaggerated Trading Emotions," all by Denise Shull. The CBOE doesn't tend to feature as many webinars on the psychology of trading, but the Dan Sheridan webinars always delve into the trading plan and the why's and how's of managing an open trade. He covers credit spreads, condors, butterflies, calendars, double diagonals and many other trades that our subscribers might attempt, always emphasizing the exit points, profit parameters, and possible adjustments.

Your online broker may also offer webinars that help. Mine, BrokersXpress, offers webinars on all aspects of the trading platform, including the different types of stops and how they could be set. A future webinar will discuss how to use profit/loss graphs.

Of course, watching these webinars takes up some time that could be better spent obsessing over your trades. And there is the concern that something you learn on those webinars might convince you that you're putting too much money at risk in iffy trades and you need to rein in your trading.

But, how's that working for ya?
 

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