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THE TRADING DEATH SPIRAL – How to Identify it and Pull Yourself Out


This article is designed to be an add-on to my previous article on trading psychology. There was a lot of interest in the Four Stages of Learning, which can be applied to almost anything in life. I know this because a fellow bodybuilder told me so. This next article highlights what happens during Stage II and even Stage III. It is one of the darkest moments in a trader’s career. It’s a time where you either “make it or break it” and there is no in between.

What is the trading “death spiral”?

Imagine for a moment: You went short Friday morning (2/27) but the market immediately rallied from the open. Then, you decided to go long, only to see the market head back down. You just took 2 consecutive losses. In your eagerness to “make it back up” or “break even”, you start to get frustrated and have feelings of despair.

Later during the day, you see the market is about to breakdown, but you don’t go short because you’ve already been burned twice in the same day. Naturally, you would have made a killing if you took this trade. You then proceed to either literally or figuratively bash your head into the wall. Perhaps you even want to throw your computer out of your window. So you don’t wait any further, you then “chase” the stock and short it at ridiculously oversold levels and catch a furious bounce, forcing you to cover. There goes loss #3.

At this moment, you are dazed and confused as to what just happened in such a short period of time. You became poorer in a matter of minutes and you are feeling hopeless and you may even be experiencing shivers, shortness of breath, sweating, and of course you may be cussing and maybe even throwing objects across the room. Your choices are either 1) to calm yourself down and move on or 2) to quit, indefinitely. You are now in a death spiral.

You go through this shift or transition from accepting and embracing losses and correcting the mistakes, into a massive pit of emotions that becomes so convoluted and built up to a point where you lose total confidence and acceptance in anything and everything. This transition can occur within minutes, or even seconds. Emotional responses replace your tactical trading method and plan (if you even have one). The death spiral is simply you digging yourself deeper and deeper into this pit. It’s an abyss that you must get out of immediately. If not, you may experience permanent psychological damage that prevents you from trading ever again.

You must learn to control your emotions or you will not be able to trade. All the programs, books, people, and anything else out there will do you no good if you do not master your emotions. Do you understand that? What I am telling you is important. Even if quitting was the only viable choice, most traders that do quit do not do so until the death spiral causes an emotional response that creates a situation so desperate that the trader cannot take it anymore and must quit. You hear of stories about how traders commit suicide, right? Well, most likely, what I said above is the reason why. You want to be aware of your emotions and catch yourself before you visit the depths of hell.

Contrary to some people’s thinking, this doesn’t apply to only Stage II’s and III’s. This happens to everyone, even professionals, because we are all human beings. The difference between a pro and a novice is that the pro can quickly identify if he/she is entering the spiral and get out quickly and with only a scratch. A novice has no clue what he/she is getting him/herself into, and as a result, suffers massive losses. You can read my pretty little charts all day long, but they won’t save you once you spiral out of control. Your emotions take full control over you as if you were possessed by a demon. You become irrational.

Consider a few a things:

  • The first time a spiral happens, you should correct and learn from it. The most important skill you can master here is to control yourself before the spiral controls you. However, every time this spiral occurs and the more you go out of control, the quicker and more devastating the next spiral(s) will be. You will lose control even faster. The pain will shut you down and you will no longer be willing to trade anymore. Correct the problem now.
  • Instead of quitting, take the time to re-build your confidence and to strengthen your emotional resolve. Quitting is taking the easy road. It is the most convenient thing to do because you don’t want to get burned again. You know the story about the little boy touching a hot stove, right? Or how about the one that got bitten by a dog? Quitting doesn’t provide any solution, and will only feed your reservoir of painful thoughts.
  • How many traders start the day winning, only to lose those gains (plus more) at the end of the day? Who’s fault is it, the market or the trader? Did the market change or did the trader change? It’s always the traders fault and the trader always changes. You NEVER blame the market under any circumstance. The emotions start coming in before the trader even starts to lose. Excitement from winning will cause the trader to lose control. The gains turn into losses. You have started another version of the death spiral.

How do you stop yourself? The key is self-awareness. You have to be aware of what you are doing. How many times have you spiraled out of control and only at the end of the day did you realized what you have done? Would it not be better if you caught yourself in the beginning and knew what you were doing and what the consequences would be if you do not stop? The moment you transition from self-unawareness to self-awareness, you will have broken through a major point in your trading career. It is a pivotal moment.

Let’s become self-aware right now. Get an index card and write the following statements on it:

  • After consecutive losses, I may be losing control of my emotions
  • Many consecutive losses usually result from trading within neutral ranges or doji days, such as 2/26*.
  • Are you following your trading method or are you overtrading?
  • Trading method losses are acceptable. All other losses are not.
  • If unsure about the market, remain neutral. Making no money is better than losing money.

(*Note: I even stated on Twitter early Friday that the day presented no sustainable trading opportunities, therefore I did not place a single trade. Pay attention).

I’m sure you get the idea, and I know that there are more statements that could be added. I will welcome suggestions in the comments section for traders who need them. The card means nothing if you don’t use it. Go ahead and tape it to the bottom of your monitor. Don’t leave it on your desk as it tends to be swept aside. This visual reminder will help you more than you can imagine.

Now, get another card, and label it as “Symptoms of a Death Spiral”. I am not bullshitting you. Now, write the following:

  • Self-unawareness may lead to “shortness of breath”, “sweating”, “squirming in your chair”, “nervousness/anxiety attacks”, “shaking/restlessness”, “feelings of hopelessness”, “confusion”, and finally, “anger”.
  • When I reach the “anger” stage of the death spiral, I may “cuss” (more than you would on a normal day), “scream”, “throw objects”, “break objects”, “jump up and down”, “bang my head into the wall”, “kick myself repeatedly”, “direct anger towards other people” (who have nothing to do with trading), “lose full normal emotional function”.

Again, you may add a few things on that list as well. If you have ideas, leave it as a comment for others who need it. Now tape this card next to the first card. The purpose of the first card is to help prevent you from digging yourself deeper into the hole. The second card is there to remind you that if you do not follow the first card, you will experience the things written on that second card. I know you don’t want to, so follow the first card. Read this everyday before the market opens. In fact, print this entire article out and read it everyday if it helps you.

If you are in a death spiral or have recently experienced one, then you may want to do the following:

  • Stop trading immediately. You cannot trade when your emotions have you under control. Go exercise, read a book, play with the dog, do something to clear your head.
  • You may want to start paper trading until you become profitable on paper. I tell people all the time, “If you can’t make fake money, how in the hell are you going to make real money”? Makes sense, doesn’t it? Get your trading methodology in order.
  • Start trading again, but only in small lots. If you used 10% per allocation, then start off with something smaller. The less money that you have at stake, the less emotional you’ll become. If you had $2,500 at stake, then you wouldn’t care much if your normal position sizes are $10,000. The death spiral will come after you the moment you try to make an “unplanned killing” motivated by your own greed.
  • As you become more comfortable, gain more confidence, and start turning a profit, then you may increase your position sizes.
  • Don’t forget this article and the two index cards. Read them daily in your trading.

I want to mention the importance of remaining neutral to single events, and that includes winning. If you get really fired up and over-the-edge excited when you make money, I mean jumping and down and calling up your friends and telling them how much of a genius you are, then you are 100% susceptible to the death spiral. In fact, you are more likely to go down the spiral faster than a non-excited trader. If you want to start trading for a living, then you have to act in a professional manner. Since most individual traders trade alone, it’s easier to “act out” on emotions, but imagine if your mother or your kids or girlfriend/wife, whatever, was in the room with you, how would you act?

I hope this helps you all. Have a great weekend!

Please take the time to fill out the poll. You may choose multiple answers that apply to you. There are no wrong answers. This is so that I know what to write about in the future.

Death Spirals

The following statements are true about me:

I am in a DS right now
I was in a DS just recently
I might get myself into a DS this coming week
I am able to identify a DS and pull myself out immediately
I haven’t been in a DS for a long time
I was in many DS’s in the past, and get them occasionally
I am unable to control my emotions, everyday
I have trouble sleeping at night because of trading
I am aware of the importance of trading psychology
I am still not self-aware of my emotions during the trading day
Current Results

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TYING YOURSELF DOWN – A Personal Experience & the 4 Stages of Learning

Back in mid-2008, I had a friend who lost over 60%. I offered to sit next to him for one afternoon while he was trading and I made sure he was free all day. This was in early September. I told him to initiate short positions and “leave them alone for a few days”. He closed out the positions within minutes. He started freaking out because a swing trade was going 5-6% against him.

I told him to re-add all the short positions. I then told him to come over to the window where a large metal pipe was running, and I handcuffed him. You can imagine how berserk he went, calling me all sorts of shit while at the same time feeling hopeless. I uncuffed him after the close. If you’re thinking “What the hell is Chart Addict doing with handcuffs in some dude’s room”, well, chill the fuck out and keep reading.

This is sort of extreme, but it’s also a personal experience. Many years ago, I used to handcuff myself during trading hours to avoid impulse trading and succumbing to my emotions. If I had to go to the bathroom or eat, I had to call my neighbor to unlock me. I did this for two full weeks and it was one of my most profound experiences in my trading career. Psychologically, I had no choice but to withstand the pain and I forced it upon myself like a madman.

Now that I have students, I can’t cuff them, but I tell them to completely walk away from the computer if they get urges. Since I am primarily a swing trader, I can withstand bounces and giving up large gains in anticipation of closing out trades for 20%, 30%, even 50% or more. In fact, I could be eating a sandwich and watching Youtube videos while my gains fade away because I have my trade’s purpose and goal always in mind with the end result in focus. The psychological aspect of trading must be your foundation, for without it, you will not succeed as a trader.

It doesn’t matter what system you trade, what programs you use, or what you subscribe to in your search for the holy grail, or “THE” answer to trading. I found that keeping it simple was the best way for me. If you notice on my daily charts, I hardly ever use technical indicators and only rely on candle charting, price action, volume, and moving averages to make an informed decision. That is really all you need to find the best set-ups that produce highly successful and high probability trades with the greatest time value of employed capital.

I use the most unconventional methods in my trading as well. Many times, I do go 100% all-in, but in the best of circumstances. I believe I will be all-in this week, switched around from long then to short, mid-week. What I do may be risky, but I am so conditioned to take calculated risks that it is second nature to me. In addition, I don’t involve myself in conventional portfolio theory or asset allocation. That is a waste of time for my resources. I trade to get the biggest bang for my money in the shortest amount of time. I don’t fool around with 1-2% movers. That’s a waste of my day.

Everything I said above may or may not apply to you. What someone might do may not be appropriate for you and your tolerances. Most people are conservative and cannot or or are unwilling to employ the strategies that I use, all of which are 100% discretionary and technical and for some, proprietary. It is important for you to figure out what kind of trader you are, what your style is, how your personality fits, etc. This will not come overnight, but rather over months and maybe even years. You must know yourself before throwing your hard earned money in the market.

With that said, there are 4 stages of Learning:

  • Stage IUnconscious Incompetence: You have no idea what you know or don’t know.
  • Stage IIConscious Incompetence: You admit that you don’t know, and you want to know how.
  • Stage IIIConscious Competence: You finally know how, but only if you think things through.
  • Stage IVUnconscious Competence: You fully know how and you instinctively take action.

During Stage I or Unconscious Incompetence, the trader doesn’t know what’s going on, and doesn’t know much about trading except for the fact that you could make millions! Also, these traders have no trading plan whatsoever. In fact, they don’t even know that they need one! Finally, the trader is unaware of the important aspect of trading psychology. We’ve all been here, done that.

During Stage II or Conscious Incompetence, the trader is all pumped up and excited about the potentials of trading. These traders look at charts all day long and flip through research reports. Finally, they open up a brokerage account anticipating great riches. This group probably reads 1 or 2 books, gets some kind of newsletter subscription, and they think they’re ready to run circles around the Market Makers. Not so fast. Unfortunately, these traders lose a lot of money and they realize that all the services and subscriptions and advice they got are no use to them This is also where the individual trader gets a taste of the emotions that come with trading (fear & greed).

This is also where traders test various strategies.  Stage II is especially difficult because the trader suffers disastrous losses and may become depressed or overwhelmed. His personal life may be severely affected. It is at this point that they decide to either move forward or quit trading. This is also where positive and negative judgments and thoughts are formed (“Am I too stupid to trade?, “Trading is too hard for me”). The trader has lost money, is afraid and confused, and has jumped into a financial and emotional abyss. You hear the statement, “90% of traders lose money”, right? This is the stage where it happens. Even if they can afford to take the financial losses, the psychological losses are excruciatingly painful for the new trader.

When the trader makes a conscious decision to take his losses and move forward, then they have reached Stage III or Conscious Competence. Usually, traders look into the abyss and somehow make it out alive. Whatever their motivation, they decided to pull themselves out. In the process, they have also accepted a few things:

  • Trading is learned until the day you die. You never stop learning.
  • Whatever they did in life, how well they did in their past occupation, and their previous successes do not equate to success in trading.
  • Being wealthy or being really smart also does not equate to success in trading. In fact, some of the biggest losers are doctors, lawyers, engineers, scientists, programmers, analysts, business owners, CEOs, retirees, etc. Why? Because typically, these people have this desire to always be right and for some reason, they refuse to take losses until they are annihilated.
  • They cannot control the markets or “will” it to do whatever they want. More importantly, they accept that they don’t need to “control the markets” to become successful in trading.
  • They must have a trading plan. Seriously though, seeking advice from traders/websites/brokers/programs/ etc. as a primary method to trade is like trying to drive to Cali from DC without a map by stopping along the entire way asking all sorts of people for directions. You might end up at Sir Stanford’s gf’s house in Fredericksburg, VA.
  • They must be psychologically prepared to trade.

Knowing where you are is important, because you now know where you need to be. Once Stage IV is reached, you must do several things:

  • Create a trading plan. Goddammit. Would you start a business without a business plan? I didn’t think so.
  • Test out the various strategies and see what “fits”. Are you a day trader, swing trader, position trader, a zombie buy-and-hold investor?
  • Do not abandon any plans just because they don’t work. There’s always a time and place for everything in such a fluid market.
  • Increase recognition and repetition. Practice, practice, and practice some more. Don’t bullshit yourself.
  • Accept the fact that taking losses, is part of the game. If you don’t like losing, stop trading immediately. I mean it. You ‘ll thank me later.
  • Do whatever is necessary to condition your psyche. Whatever is necessary, even handcuffing yourself.

After a while, you’ll be able to understand odds and probabilities, differentiate for market conditions, learn to capture the meat of profits, scale in-and-out of positions, accept multiple & consecutive losses, learn to hold positions during heavy pressure, develop the “trader’s intuition”, place trades without hesitation and finally, become consistently profitable, week after week, month after month.

Hope this helps some of you out there.

Where are you within the 4 Stages of Learning?

Stage I – Unconscious Incompetence
Stage II – Conscious Incompetence
Stage III – Conscious Competence
Stage IV – Unconscious Competence
Current Results

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