Everyone is different and unique; therefore, everyone thought process is different and unique as well. We can all agree on the same subject, but how our thought processes arrive at the same conclusion is totally different. Each one of us will react differently if the agreed subject matter changes its form.
It is my thesis that each of our thought process is an energy with its own unique frequency and wave pattern “fingerprint” so to speak. In other words, we all beat our own drum when it comes to how we think. Not only that our thought process is as unique as fingerprint, our overload level or “tilting point” is unique as well. When we “tilt”, we arrive at the fight or flight mental stage. This is the mental stage where our ego will bury us with extreme fear (flight/panic) or extreme bravado (fight). Neither are productive for our portfolio management.
Our natural mind, or our need to be right, set a ceiling for our frequency range as well as its wave amplitude before we tilt. As long as we don’t tilt, our natural mind will function like a normal mind that will allow room for our trading mind to take over if we are focused enough . This normal range is what some people call the “comfort zone”. This is why when we meditate, our mind will be further away from our tilting point. However, the moment we stress ourselves out with thought processes such as fear, worry, greed, etc, we exceed our comfort zone and our natural mind will enter into an extreme mental stage which will put our portfolio into jeopardy.
Now, do you understand why we need to beat our own drum when we trade?
Suppose you follow trader X whose personality, tolerance, and experience provide him/her with a tilting point of 7 on a scale of 10. Meanwhile, your tilting point based on your personality, tolerance, and experience has a level of 5.
What do you think will happen?
Trader X can hold on his trade against drawdown in a calm manner while you are already tilted over with extreme emotional reaction to the drawdown. There is no telling what kind of revenge trading you will do to the trade which may cause severe damage to your portfolio. At the end of the stock run, trader X may walk away from the trade with a nice gain while you may already have suffered severe damage to your portfolio due to your tilting.
I like to mention that success in trading does not depending on how high your titling point is. In fact, the higher your tilting point, the faster you may lose your money if you don’t apply proper money management.
Tilting is the “out-of-control” stage where your decision making is based on extreme emotional thought process. An important part of being successful in trading is your ability to avoid tilting. You can have a tilting point of 3 and still succeed in trading because you have the awareness to trade only the type of investment vehicles that you know won’t push you into tilt mode. Or you have the awareness to choose a trading style that will help you avoid the tilting point.
Let me give you an example of tilting from my personal experience.
I started my trading journey trading T-Bond in the futures market. Interest rate was dropping and I bought T-bond futures based on someone recommendation. I made money on my first trade in the futures market and I was hooked. Having a commodity broker account, I naturally traded other commodities such as pork belly, sugar, orange juice, cotton, SP500, etc Because of their high leverage, I daytraded these commodities more than I held them for swing trade. Due to the short-term nature and my lack of discipline at the time, I had a hard time holding to my profit. If I made money one day, I would end up giving it back sooner or later. Of all the trading vehicles in the futures market, the SP500 Index futures was the only one that made me tilt.
I tilted only two times during my few years of trading the SP500 and it was two times too many. Each time I tilted, I would lose about ten times more than I would normally allow myself to lose in a day. While the amount I lost during tilting did not destroy my portfolio, it was a 15% loss compared to a 1.5% loss. After I tilted the first time, I had the good sense to stop trading for a few months to take a break.
The trade would start out with SP500 taking a gap down at open. I would then wait for the bounce to short. The bounce came and I shorted. Bang! Right on the money! I took profit and waited for the next bounce. The bounce came again and I shorted again; only this time, price action continued higher. Before I knew it, I was stopped out for loss that practically took away my earlier gain. Seeing that it was a gap down at the open, I decided that price action for the SP500 index would eventually go back down again. So, I picked the next resistance level to short. Price went up to my sell stop and I got filled for the short trade. At first, the trade would drop from the resistance and I won back my original gain on paper. However, this day was unlike any other day, this day I wanted more. I wanted a waterfall price action because my ego dictated that the SP500 had to fall further down. So instead of taking my profit on my the 3rd attempt to short, I waited for the price to break the support and drop like a rock. No! Price action bounced from the support and headed higher. The paper profit I saw vanished in front of my eyes and now I was seeing red.
I didn’t know it then but I was on the verge of tilting. I got mad at giving back my paper gain so quickly. So I decided to average down my losses by shorting more contracts. Lo and behold, price did not fall. It kept going up! Suddenly, I was starring at a loss that was three times the size of my earlier gain. I got really pissed. Boom! I tilted over!
I wanted to turn my loss back to gain as soon as possible. So I figured if price really wanted to go up. Fine! I would then covered my shorts with twice the amount of contracts so I could go long.
OK! SP500, you want to go up! I’m going up with you! By this time, I didn’t care about my portfolio anymore, all I cared about was to be right about my trade.
Unfortunately, I reversed to go long right at the top of a giant retracement. Holy F**K! I was starring at loss that was now six times the size of my morning gain! My emotion was going full steam.
No Fu*king way! You are supposed to go up!
So I averaged down and bought more contracts. But price kept on going down!
By the times I reached my pain threshold, I suffered a 15% loss on the SP500 trades due to revenge trading from tilting.
The 2nd time I tilted over on my SP500 Index future trades, I stopped trading for almost a year to find myself.
When I was ready to trade again, I chose stock trading instead. It all started because my full service Merrill Lynch broker would recommend a stock and proceeded to lose money for me. Yes, that was before Merrill Lynch went under and became part of Bank of America. After multiple times of losing, I decided that I could do better using whatever skills I learned from commodity trading to apply to the stock market. Lo and behold, probably due to the low leverage in stock trading compared to the high leverage in commodity, I have not experienced tilting ever since.
Now that I’m trading strictly on cash with no margin and with my commitment to avoid averaging down while losing, my odd of tilting is practically zero. Oh yeah, cutting losses quickly play an important part as well.
The point I’m making is that you have to find your own tilt level and then beat your own drum underneath it . You need to know how you can trade without tilting. If you want to pick someone else stock pick, by all mean, but use your own trading style to execute the trade. Otherwise, you are in danger of tilting.
Don’t worry about how other traders are doing with their multiple stock picks; just focus on the picks that you like. Just because other traders make money with the picks you shy away doesn’t mean you miss your chance. You may suffer tilting from other traders’ pick simply because the stocks are not right for your trading style. You must find the picks that you feel are aligning to the rhythm of your own drum beating.
Sometimes you may not have done the revenge trading like I had done with the SP500; but if you are sitting on a losing trade that make you nervous everyday, you may have already been tilted especially when you are asking everyone what you should do with the trade. When you have to ask someone what to do with your trade, you are no longer beating your own drum.
You must take the time to find your own drum (the right market or the right stocks to trade) and the rhythm (trading style) to beat. It will take some trials and errors before you find yourself.
To find yourself, you need to understand yourself. To understand yourself, you need to look within yourself and be honest about your strengths and weaknesses.
And yes, I’ve never said beating your own drum is a walk in the park. But to have a chance to win in this game, it pays that you learn how to beat your own drum pronto!
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and the best two cents.thanks.i stepped back a year ago after i knew i “tilted”.i kept thinking the revenge thing,i just couldnt take myself there,i had already ruined myself.still own shares,of bullshit no less.listening to anyone,unless your side by side with that “other trader” WILL get you in trouble.wish i never listened to anyone.jumped on the lumber train at the bottom in 09. after telling a few folks everyone jumped in, some called me nuts,made some tall coin up into 2010.after flash crash,well,lets just say i got real gun shy,and super pissed at the same time and trying to get it all back now,just isnt gonna happen.but i been stacking pm’s instead of giving my money to wall street any more.we are in an age now,where all of everyone’s holdings are known in every port including day traders who are in and out in minutes,and the algo’s they have set up are just for that purpose.you may be179% in profit like i was in lumber in a years time,problem is,the algo’s will take it back in a years time. the playing field has been blown to smithereens.i know how i beat my drum,problem now is,all the black boxes do to. their agenda is not mine, or the well being of a free market. the two drunks that are holding each other up, as art cashin would say, well they need two more drunks to hold up the first two.
Thanks for the input drummerboy. Yes, the algos or black boxes are changing the playing field in such a way that when you see profit, you have to take it. Holding the position for a bit longer to soak in the trend is becoming harder and harder because the algos will come in and kill the trend and steal your profit.
The new game here is to find a way to know what the algos are doing…
Yet another excellent piece in this series, Zen.
Thanks for sharing some S&P trading stories.
Thanks for the feedback, Raul.
I’m going to dig out my notes on the opening range breakout and give it a spin sometimes soon. Thanks for reminding me of it with your blog posts. 🙂