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!
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problem I have is when I am in a trade, if I am up I sell to quickly (gotta lock in those gains), but when I am down, tend to hold longer than I should. Or, I watch the screen all day paralized of waiting for the ‘perfect’ opportunity. If I do not take the trade, and it moves up I say “I knew I should have taken that trade” if it moves down “glad I didn’t take that one” hence the ‘deer in the headlights” syndrome most days.
Another great article John. Goes back to my stopwatch. You count the number of seconds you feel “the symptoms” as you described, and you get that number to zero. I have seen myself lose thousands per minute, and what do I do? Nothing, if it isn’t warranted, and if it is, I planned for it.
I don’t give a SHIT about the money I trade. Of course I do, but I don’t. Gives me a clear head.
Also, as a personal mistake I have made in the past, people seem to go at the market as if this is it.
You got the prom queen back at your house? That is the opportunity, you need to chase it. She’s the hottest girl in school and she’s at your house drunk, who knows what the fuck you said to get her to come back with you, now you to go for it and put your chips on that table (or balls). We’ve all been there.
The market gives you a prom queen every day, every week, every year, forever. So if you miss her, it literally is no big deal. Missed the downside? Catch the upside. Oh I knew that stock would break out and I missed it? Catch the next one.
The market never closes people. I could quit, see yall in 20 years, and aside from faster computers, it’ll still be there.
The prom queen example is a one night only, bang this girl or you will kick yourself. The market is never like that. There is no need to chase. EVER.
puss, try planning your opportunities the night before.
You do your part. you planned the trade, you know why it would work or not, and you quantified your risk. Great job.
Now, you show up to work at 630 am. If your plan is there, trade it. If it isn’t go eat some donuts.
Selling to quickly when up is a psychological defense against pain. You never go broke taking a profit, but if you design your system in that you will be, say, 60% accurate, then you are building in the fact that winners will be 2:1, or something.
Here’s where people go wrong—> you are basing a trade off of something. What is it? Tell me. And then, tell me how your strategy produces an edge. Here’s a hint — bouncing off the 50day is not an edge.
Too many people subscribe to methods that are specious at best, then they try to apply them in a non-robotic way. Thus failure.
Puss puss, much as I hate this hackneyed phrase…been there done that..I believe everyone has. I made great $ in the Bull market and was flummoxed this fall..Had to get my shit squared away and fast. It was eating me up how stupid I had been, and greed was the factor once inexperience in a horrible bear market twice. I started by saying fuck the money I’ve pissed more away on a 30 day leave in Bangkok (not as much, but it helped with perspective) Then Knowledge and Discipline were increased at an intensive rate.Danny nailed the preparation part, and find what works for you. I never get upset cause I leave a little money on the table, just happy I took a profit I was content with and again analyze the trade. Good luck ,stick with it and accept that it is soo much harder in a market like this
Excellent article and comments! Plan, execute with detachment, and move on. If there is anything that invalidates your plan move to the next plan or to the sidelines. Never ever revenge trade against a loss.
Nice Johnny, and nice follow for the alley oop dunk, Danny.
We’ve got some good young brains here.
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Decidedly.
Great article, thank you.
Danny-
Humor the new guy. I trade a system where something has to be at the bottom of a Bollinger Band, stochastics and other indicators have to be oversold, and starting to move upward from that oversold level to take the position. If you take the position at the mid BB, you take the chance of it continuing down to the lower BB, etc., so to increase the likelyhood of success, wait until it is oversold. You can go short, when indicators are the opposite (overbought). It can be used for day and swing trading, so you can use it based on a 1, 5, 15 MIN chart more so for daytrading, up to 30, one hr, daily chart for longer term swing positioning. So essentially, everyday, several times a day, the indicators line up accordingly, on a 1 or 5 min chart. 5 min chart obviously cuts down on alot of noise. As long as the stock has some movement, you can use the system. You sell when it gets rejected at mid BB, (assuming you take it at the lower BB going long) otherwise you sell it at top of BB. Simple, nothing every other day trader isn’t watching.
I think it more a new guy tryng to get a footing on daytrading in a bear market, learning position size, not wanting to loss $, etc. All the beginner stuff.
ok, give me a pat on the back, a kick in the ass, and tell me it is going to be all right…
Nice work on newsletter. Over my head some days, but hey..
It’s only been a year for me and I lost an incredible amount of money in gold stalks this summer, so I cut way back and my trading account is pretty much baby sized now. When it was paper money I didn’t really care enough to be devoted to the time/commitment, so paper trading didn’t work for me. A small account of real money however keeps me invested and having fun, and when I know I can be profitable I will increase.
So, long story short, I am not financially invested enough to experience a death spiral, but I am completely invested in seeing how big I can grow the baby.
I have not shorted a stock yet and that’s mainly because I do not want to trade on margin right now. I know enough to know that I could get in serious trouble with that. I did get the book Ozark rec’d on shorting though and will down the road.
It’s fun, it’s exciting, it works your brain and I think that is what anything you do in life is supposed to be.
Thanks CA (and Danny) for your insight.
Hey Puss Puss, as one beginner to another, we picked one hell of a year to start learning. The upside is we will glide like warm butter on hot cornbread when the next bull market comes along. We’re in basic training Marine style right now, with the Sargent from hell hating our guts and getting off on bringing us to our knees. LOL (or maybe you’re a faster learner than me)
Hey yo Puss Puss, Chanci… I am with you on the newbie role! I’ve been investing since 2006, but I just began trading in October… Hell of a year indeed. I hope all the rookies that are out there are beginning to get the hang of it as I feel that I have, and I wish everyone good luck this coming week!
ZM
Excellent article, as usual Mr CA, good sir.
For the past 3 weeks I have Been trading like a wizard.
Highly profitable every day, consistantly.
Before trading I relax, do some meditations, visualizations, then I turn on my Natura Sound Therapy for the trading day.
So far so good,then came Friday.
Here is how the “Dreaded Spiral” happened for me.
1. Position size, too large= Greed.
Instead of drastically reducing my position sizes based on the probability of at least a few losing trades, I greedily doubled the size on the first trade of the day, this is what happened next, my Esignal platform crashed, and within minutes I was down thousand’s of $$$.
I quickly got the **** out of the trade on FAZ,
BUT IT WAS TOO LATE, I was out of control emotionally, bang, right back into another trade on FAS, “Revenge Trade”, of course you know what that results in, more losses.
I caught myself and walked away from the computer to calm down and think about what happened.I know from experience that this can happen to any trader, so I refuse to beat the **** out of myself for screwing up.
I later came back to my trading platform and made back some of the loss, but I was still quite shaken.I know exactly the mistakes I made and take full responsibility for them.
Here is a list of the mistakes, and the corrective actions that will be taken.
1. I was undisciplined and impatient, didn’t wait for my usual entry signal, wheneve I wait patiently for the right signal and entry, the trade usually works out right from the start.
2. I got cocky, thinking I was a genius, and got a forced feeding on humble pie!
3.Position size and risk management went right out the window. The Fly EVEN WARNED ME THE NIGHT BEFORE ” BE CAREFUL” is what he said.
4.Panic, on the first trade I should have just walked away to calm down before getting back in.
The Good News is I walked away after the second trade, which for me is progress, not perfection.
I hope this will help someone else, to make better trading decisions.
Thanks.
I’ve been trying to find the camera CA was using to watch me Friday afternoon. He took very good notes.
Nice essay.
bradj Says:
You are not alone on that.
Nice analogy with the prom queen, Danny. I’ll remember that one. I always tell people that the stock market is a train station …. if you miss one train, just catch the next one. Don’t get dragged down the rails chasing after a lost opportunity.
Chanci, another good book is “Sell and Sell Short” by Alexander Elder. He also wrote the classic “Trading for a Living.” These books represent a more rounded, all around trading approach than the previous book I mentioned. Dr Elder includes a lot about trading psychology.
This Friday was one of the craziest days we have had in awhile. I exited some very long term shorts (from 2007!) at the close because the risk/reward just isn’t there for me anymore, although I still think we go a bit lower.
Nice play, Razorback.
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Great article!
This is a must read for all traders!
thanks for this, CA.
puss puss,
i belong to the “sell your winners early and let your losses run” camp too. the thing is, i know about it but i still keep on doing it.
recently, i have learned to just walk away from losing trades. however, i still take profits way too early.
Danny, I love your analogies. I wish I even went to a prom. I went to a conservative Christian school where there was no prom or homecoming. In fact, we had the “6 inch rule” which prevented any kind of touching of the opposite sex. HS was tough.
I see quite a few common problems that people have described. Everyone has gone/will go through them. All of them can be corrected.
For those who have the “selling the winners, letting losses run” issue, that’s mostly a matter of not having a solid trading plan and methodology. There is no strategy, no pre-planned entry and exit. The psychological part of it has to do with whether or not you are able to follow the plan itself. Perhaps one of Wood’s mechanical systems can be an option.
I’ll cover the psychological part in a future article.
Great write up. God, this brings back memories that chill me to the bone. I hope many readers reach their pivotal area, when the “death spiral” is something you see in others, and no longer experience yourselves.
Brilliant advice. These kind of articles alone are worth the membership fee.
CA, good stuff. Great job.
Re: holding losers too long, taking profits too quickly…
There is much research to show that we as humans are programmed to react this way, and will react this way in other situations outside of stock trading.
A clear, profitable trade plan should go a long way in helping resolve it, but until the psychological bias that is behind it is addressed, any trade plan will likely get over-ridden, eventually.
hmmm.
Robo trading seems to be the way to go on this.
Hand over a piece of the equity to an auto-trading system and walk away for the day.
Thoughts?
Cuervos – Yes and no… If you have “issues” trading, they will manifest them regardless of the system you are using. An auto-trading system might work for a while, but a big drawdown or for that matter large profits might blow the trader up.
Someone once described it to me as playing “whack-a-mole” with life. Every once in a while some resolved issue comes back and pops its head up. The thing to do it “Whack it!” with that big mallet and carry on. If or when it comes back, just do it again.
CA – great post.
In fact, we had the “6 inch rule” which prevented any kind of touching of the opposite sex.
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Damn those prudes! I feel you pain, we had a 6″ rule too. Of course, they made me follow the 9″ rule, for reasons not so obvious via the interwebs. HA!
There are only 2 emotions: Greed and Fear
Y&BB is right. I use discretionary while Wood uses mechanical. Both work, but the individual strategies fit out personalities, lifestyles, preferences, etc. It’s everyone’s quest to find what “fits” them. It’s like a shoe, not everyone fits the same size.
lol @ MOOBER! I hated private school so much man. We had to be sneaky to “violate the 6in rule” in the dark empty class rooms when everyone left rofl.
Kudlow, we have quite a few emotions out there besides the primary ones, such as joy, anticipation, anger, acceptance, sadness, surprise, love, remorse, contempt, awe, relief, etc. It’s important for people to stop short of some of these emotions as well.
Chart Addict thanks for the post.
I have come up with a plan and have a 3 month deadline and if I do well will have another 3 month deadline….for monitoring my trading.
It was nice to read about how others went through the same thing.
Great post man. Kudos.
test
Fantastic post, man. Thanks!