You go long and the market immediately goes down, you go short and the market immediately goes up. That’s two consecutive losses, and you are getting a little anxious so you don’t take the next trade. Of course, this trade is a winner. Now to make the situation worse, you then chase the move, and as soon as you enter the trade it immediately reverses, thus giving you another loss and this is now three in a row. Ok one more try, this can’t happen on every trade, can it?
This time though, you will be really clever. You have noticed that the market is in a range, and it’s the bounce from the low/retrace from the high that is causing all the problems. So this time, the next trade you take will be a range extreme fade and the hell with your trading method. The market is at the range low, and per your new on the fly trading plan, you go long. Instead of bouncing again, the range immediately breaks out to the downside.
Now what are you supposed to do, quit? And to be sure that there is no more temptation your throw your computer out the window, and dive out right behind it. You are in a trading psychology spiral.
What is a Trading Psychology Spiral?
I think of a trading psychology spiral as the transition from trading losses that you have accepted both as a part of your trading method and as something that is inevitable in trading, into a surge of emotions that continually builds to a point where you can no longer accept anything. As this eventually spirals out of control trading method becomes completely ignored, and is then replaced by emotional responses and decisions for everything that is done. Even if quitting was really the only viable thing to do at the time, the trading psychology spiral can cause an emotional response where this isn’t even considered until the situation becomes so desperate, that the trader can’t take it any longer and does have to quit.
This isn’t a discussion about emotions and trading, and the various fears and issues that keep a trader from trading, to begin with; as we know, emotions are an inherent part of trading you learn to control them or you can’t trade. This is a discussion about emotions that are typically controlled well enough so that you can trade, but then something happens where the trader loses that control, and their emotions spiral. A series of consecutive losing trades, especially those caused by deviating from the trading plan, is a root cause for this happening.
This also isn’t about something that happens only to inexperienced and unprofitable traders. There are going to be those times where nothing a trader does will work, and that result is going to be a series of consecutive losers. So the situation is the same, it’s the reaction that may be different. For instance, Trader A may go into a panic causing them to spiral out of control, losing all self-confidence and self-trust, and ultimately more money than was intended. On the other hand, Trader B may go into a period of revenge trading, coupled with an increase of their trading size, as they are sure that each next trade is going to bring them back to even. Also, a spiral out of control, and the losses continue and also a loss of more money than was intended. What does Trader C do?
Controlling The Trading Psychology Spiral
Each time a trading psychological spiral occurs and you go out of control, the quicker the next spiral is going to occur, the faster you will go out of control when it happens. This is going to continue until trading becomes too painful, and you will not be willing to trade any longer.
It is better to work through the emotions instead of quitting. Quitting is too easy, and this provides no solution or aid in preventing this from coming back and intensifying each time you have a rough period. As well, you have lost the ability to ‘count’ on yourself when you need to do so the most. To control a trading psychological spiral, before you go out of control, is a tremendous win in and of itself. Do this, and get your trading back on track, and you will have made gains the value of which you can’t imagine, as you will know that you may have losing periods but you can trust yourself to remain in control, and not magnify the damage.
In light of this, take what you believe to be your key trading issues, write them on an index card, and stick them on to your monitor. The objective is realization and awareness, thus making these issues available to your conscious as a reminder, instead of only available to your subconscious as a problem. As you make your notes be sure that you are writing short non-judgmental notes, don’t let the solution make the problem worse.
For instance, consider the combination of a build of emotions coming from consecutive losses which are also occurring during congestion, write notes similar to these on your card:
A build in emotions may come from a series of quick consecutive losses, quick consecutive losses often come from trading inside of congestion. Are your losses ‘base’ congestion method trades or are you overtrading? There is nothing wrong with base method trade loses. Your trading results are fine when you base method trade
Now consider the same situation but different notes:
Don’t be a stupid idiot and overtrade congestion like you always do. You are going to lose your ass and end up with another losing day as usual. You do this same crap every day and the same thing happens. You have no reason to even trade if this is all that you are going to do.
Remain neutral – another note for your index cards.
Another approach may be to write notes that include the things you can remember yourself doing or feeling as you transition from acceptable emotion to trading psychological spiraling, for instance: shortness of breath – sweating – squirming in your chair – unable to sit down. And as the spiraling becomes more intense: cussing – screaming – throwing things – breaking things. Until the spiraling is out of control: panic – desperation. Clearly, there is a whole list of physical responses to uncomfortable emotional situations; realizing them as they occur may be a step in controlling them before they take-over and lead to spiraling.
It is very important to acknowledge that you have emotions, and not try to ignore them or hide from them as a solution to the problem or because you perceive them to be a sign of weakness. This actually will just make the situation worse. You are human, humans have emotions, emotions become more intense in more difficult situations. So, I don’t need to know how I am going to have responded as I go out of control. I do need to know, and have something to remember, and/or think about, that can keep this from happening, that can keep me as neutral as possible, in what would be the more difficult trading periods and something that will push me back to base trade method and away from Trading Psychological Spiral.
What does Trader C do?
Trader C is the trader who remains the most neutral in winning and losing; the most neutral in all situations. It’s this neutrality that becomes essential in keeping the emotions from becoming a trading psychology spiral, as the trader can accurately evaluate their losses in terms of method. This trader will only trade their most base method setups after any difficult period and if these lose, so be it, that possibility has already been accepted. Go on to the next trading method, it probably will be a winner.