Reader question: how to not blow yourself up. Pattern interrupts can help.

Reader Steve asks a good question:

Hi. I know that most of what you talk about isn’t really about daytrading, but I am a daytrader and I have a question. Overall I’m not making money. I’ve found that my problem is that I have a few big losing days each month. I set a daily loss limit and am supposed to stop when I reach the limit but I find myself getting angry and trading bigger the closer I get to it. Yesterday I lost almost three times my limit. How do I stop myself from hurting my trading account? Thank you and if you could answer this on your blog I know I’m not the only person who does this to myself.

Well, Steve, no–you are not the only person who does this. In fact, it’s very common for traders on all timeframes to do some kind of “revenge trading”. In fact, the Confucius quote along the lines of “when you embark on a journey of revenge, dig two graves” doesn’t really apply here. You’re not going to hurt the market, only yourself! Getting this aspect of trading under control is crucial; if you don’t do it, you aren’t going to succeed in this business. Whatever profits you make will leave faster than you make them. Sadly, it’s not so easy as just saying “follow your rules” and leaving it at that. It’s vitally important to avoid emotional, revenge trading, and to avoid “going on tilt”.

stopI don’t think there’s any one-size-fits-all solution, either. People have different psychological makeups and respond to this kind of stress differently. Some people do well being down and behind and fighting to get back–there are even successful traders who do their best work like this, and some of them do manage to constructively harness an impressive degree of emotion. For others, cultivating a detached perspective is important because any strong emotional content sends them over the edge. You have to work hard to understand yourself, your triggers, and how to deal with them. This is a critical part of the “know yourself” aspect of trading.

For me, there were two parts to the solution: 1) realizing how stupid this is and 2) creating some kind of pattern interrupt. Both of those were important; the first is intellectual, but that cannot adequately and fully address the problem. Understanding, reason, analysis–these are all great, but we are dealing with an emotional and behavioral problem and reason has limited power. I spent a lot of time in reflection after some of these events, and finally realized that this was not how I wanted to live my life and I couldn’t trade well if I continued to be stupid. (The image of a video game character getting stuck in a loop and running into a brick wall was powerful imagery for me–seeing him keep hitting it, then getting bloody, then making a bloody splat on the wall, but his legs won’t stop–they are out of his control and keep picking him up and running him into the wall again and again and again, even after he starts bleeding, even after his head falls off, even after he turns into a big, gross, bloody pulp… you get the idea. This was the equivalent of what I was doing to myself as a trader about once a month.)

The pattern interrupt is even more important, I think. Bad things happen to us often because we make them or let them happen; we go through chains of behavior that lead to predictably bad results. After the fact, we are driven to ask, “why would you do that to yourself? Wasn’t it obvious?” Well, it is when we look at it rationally, but in the heat of the battle we are not rational. Our brains are flooded with flight or fight chemicals, and we are not able to make good decisions. What you need is some really simple tool to break that usual pattern of behavior and change it. I had a friend who stopped a serious smoking habit with the classic “snap the rubber band on the wrist” method–cliché, but it is a pattern interrupt and it works if you want it to. Do you typically have a fight with your spouse? Can you identify what leads up to it? Then do something different: when ____ happens, go for a walk, get a glass of water, randomly say “I love you”… do something different.

As a daytrader, my answer was to write myself a letter. The letter was to be read when I had reached a specific loss limit, either in numbers of consecutive losses or in actual dollars lost. Today, I realize that some small fraction of those days I might have been down just due to bad luck (anyone can have 4 losing traders in a row), but I also know that, far more often, I was in that spot because I was doing something stupid. I attach the letter below so you can adapt it to your own situation. Here are the points I found useful:

  • Write simply. Write to yourself as if you were a small child. Use simple sentences and words.
  • Be tough on yourself. Maybe not Gunny Sgt. Hartman Full Metal Jacket tough, but be tough. You’re reading this to yourself because you are doing something pretty dumb and destructive and let’s just say things as they are. Don’t sugar coat it.
  • Include specific behavioral alternatives. Tell yourself what to do. In my case, it was get up and go for a walk. Above all, stop trading.
  • Include some positive reinforcement. Remind yourself that you don’t actually suck at trading, even though you might suck today.

So, here is my “open letter to myself: today, a loser, but tomorrow, probably not:”

If you are reading this, it is because you are within  ______ of your loss limit today. Let’s slow down and consider how we got here.

There are three ways this usually happens. If you got here because you lost track of your risk on a trade or a number of trades, you are just an idiot and I can’t help you. It is also possible that you just aren’t seeing the market clearly today, for whatever reason. Think hard about that. If either of those things are true, maybe you should pack it in and just go home. Tomorrow is a new day.

However, it is more likely that today’s market is not the kind of market that plays to your strengths. You have a specific skill set, and within this realm you are probably as good as anyone out there. You understand the ebb and flow of a trending market, and how to press trades in those markets to maximum advantage. You usually don’t get shaken out by noise–you can hold trades in this kind of market better than almost anyone else… and, more often than not, you catch the turn at the end so you know when to get out. You do need to remember that maybe 1 in 5 trading days really rewards this style of trading. Chances are, today is not one of those days or you wouldn’t be reading this right now.

What do you do now? Well, first of all take a deep breath and go for a short walk. Now. You are not going to make a brilliant trade in the next 15 seconds. You do not have to be here. In fact, your brain chemistry is compromised so you aren’t quite in your right mind–you cannot make good decisions right now. There is a really good chance the next trade you make will be your last one for the day, and then you can sit there and think about what an idiot you are for the rest of the day. Not pleasant or productive, so go for that walk right now.

Lastly, when you come back to the screen, the right course of action is to chip away at this loss. Think carefully about your next trading decision. You are going to be tempted to put on a lot of risk to try to make a big dent in your loss, but you know that almost never works. On a day you’re really in sync with the market, you can recover this loss in a single trade in a few minutes, but this clearly is not that day or you wouldn’t be reading this right now. Make a few ticks on small size and then use that cushion to take larger risk. Make $10 at first… $5 is even ok. Green is good. Hit singles, not home runs.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 11 Comments

  1. Adrian

    If you wouldn’t know Adam and his trading philosophy, you would say the subliminal message of this post is: give up discretionary trading, start 100% systematic trading 🙂

  2. Grant

    Stop day trading?

  3. owen cooper

    Got this pinned on my wall

    Cut losses

    Cut losses

    Cut losses

    Then you might make money in the markets

    Cannot remember the author, but it has kept me out of trouble
    most of the time.

    Also a nice easy to remember discipline guide is TOPS -COLA which
    merely says “take our profits slowly” and “cut off losses at once” (courtesy
    T.S. chande)

    Stick that to the bottom of Adams open letter to yourself.

  4. Todd Dyer

    Very good post Adam. I am going to write my self a letter too.

    Thank you and keep the posts coming!

Comments are closed.