Trading is great—you’ll have no boss, can work whenever you want, and make boatloads of money! (Or so the email I got from a MLM forex scammer this morning tells me…) While there might be a grain of truth in all of this, there’s a bigger truth that’s often overlooked: trading is hard and some frustrating things will happen to you. If you trade a long time, those frustrating things will happen to you many times. Here are some of the most common, and then we’ll talk about what to do about them:
- Sometimes you’ll pick the wrong market. If you trade stocks, you have many choices. With currencies, you’ll have GBP, EUR, JPY set up against the USD, and which to pick? Commodities—you could take the trade in crude, heat, or RBOB, but how do you choose? One thing is certain: no matter how carefully you do your trade selection, sometimes you’ll just have the trade in the wrong market. You’ll stalk your entry, get triggered in, and then watch the one you didn’t buy explode to the profit target. Sometimes you’ll get a double whammy and you’ll get stopped out while the one you didn’t take would quickly work in your favor. In trading, the road not traveled can be painful indeed.
- Sometimes “they’ll” get your stop. Many traders are almost superstitious about the market’s ability to get their stops. In most cases, I think it’s a combination of putting stops in wrong places and cognitive bias (we see pattern an intent where none exists), but there are also cases in which certain market participants legitimately run the stops. Even after doing this pretty much every day for over two decades, I still sell the low or buy the high of the day sometimes. Sometimes it’s so bad it’s amusing, but sometimes it’s not funny at all!
- You’ll go through cycles in your performance. No matter how you think you’re going to game the system (a classic example is daytrading so you’ll never have a drawdown), drawdowns are a part of every trading methodology. You’ll probably go through periods where it seems you can do nothing wrong, and you’ll also go through stretches where winning trades are rare indeed. Some of these cycles will be easy to ride out, but some of them can put you in a bad mental place. Speaking of which…
- You will be emotional. For all the trading psychology talk of managing your emotions, understanding probabilities, and developing emotional coping skills, you’re still human. Every decision you make is a combination of rational analysis and emotion. You will never eliminate your emotions, but what you can do is learn to control their impact on your behavior; some traders even learn to use emotion in a very constructive way. In particular, when outside pressures start to pile up (classic examples are health problems, marital problems, real estate or tax problems, etc.) your emotions can be effected, and this can hurt your trading.
- Sometimes you’ll make mistakes. You’ll enter a buy instead of a sell, maybe add a zero, put an order in a wrong place so it’s filled right away, accidentally cancel a stop so you discover a loss is bigger than expected, close one leg of a spread but not the others—the list goes on. Even with good process, checklist, and careful work, you’ll still make mistakes.
- Lots of other bad things will happen to you. Some of them we can plan for, but some of them will be nice little jackpot surprises from the Universe. Just know they’re out there.
Fun list, right? Great marketing material too—doesn’t everyone want to trade now?! This is the gritty day-to-day reality of trading, and it’s hard. The solution is pretty simple: you must have a good plan and you have to execute that trade with discipline. Specifically, dig into the list above and think about each of those things in context of this solution: If you make a mistake, well, that’s out of the plan, so you should correct the mistake immediately. If you’re emotional, then perhaps your plan should have included some way to monitor your emotional state and decide how to move forward? Are the cycles in your performance in line with your historical performance? You’ll know this because your plan and process includes some periodic trade review. Nothing is sillier than getting upset when things are working as they should be!
For some of the other things—getting “ticked out” on your stops, picking the wrong market, etc.—this is just part of the game and you have to know it, plan for it, and be prepared. When these things happen, it’s no big deal because you were expecting them, and what do you do? That’s right: follow the plan, and execute the plan with perfect discipline.
I don’t mean to trivialize these events. Many people who quit somewhere along the journey to profitability quit because of one of these things. For traders, these things can be deadly, but, with proper preparation and guidance, even difficult challenges can be overcome. Have a plan. Follow the plan.