How to deal with (trading) heartbreak.

I’ve had my share of scars.

Some of the most memorable moments in my trading life, where positions that went from profitable, to potentially life changing profitable, to painful losses.

The “life-changing” part of some trades triggers the type of irrationality that characterizes many life experiences, not least of which the type the junior high crush on the girl in geography class.   The adrenaline and excitement leads to make imprudent decisions, to become greedy or fearful, to second-guess yourself and to wonder if you are good enough to win (her).

I continue to learn and get better, but this month I had another one of those trades.  Fear led me to get out of trade way too soon.  One that would have made the month on its own.  Greed led me to go after trades by taking too much risk (too many contracts, too tight stops, with relatively uninteresting odds).  I went from potentially being up around $11,000 to being down $1,600 for the month.  I started the months with $9,817 in my account.  You get the % swing…

Here are some things that I think help avoid heartbreaks or deal with it when it happens.

To avoid it:

  • Stick to the plan that you have written out. When you stick to the plan, you can never really blame your lack of fortitude and nerve.  You are just doing your job and, as Peter Brandt call it, be a “order-enterer.”

The plan can still lead to heartbreak when the market just seems to chase your stops and get you out of a trade that was perfect and could have been great.

To deal with it:

  • Don’t try to make up for it.  There is a temptation, right after losing on a trade that directionally correct, but poorly executed, to make up for the loss.  The thought process is, “I was right! I knew I was right… I need to get back on this trade.. .oh, and  this one too, I know I’m right on this other trade also, I’ll just do better!” but without digesting the first loss, processing it and learning from it, it’s unwise to get back on new trades too quickly.  The greed and fear is still in your brain.  You need to flush them out of your thinking and refocus on your process.
  • Wait.  Wait for a trade that fits your system’s parameter.  If you are still greedy, you’ll be even more greedy after a heartbreak.  Just wait.

Really, it’s not that different than that junior high heartbreak.  Don’t rebound into another crush.  Stick to your standards.

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