I started thinking late last week that I am too attached to the outcome of my trades. By which I mean, when I have trades on, I obsess over each tick. I think it’s a natural inclination, since enough ticks have to go in my favor to keep me in food and shelter. But, it’s also a useless practice. Worse than useless, it’s actually stress, which is harmful.

I am not talking about heart-pounding, debilitating stress. I worked through that long ago, and detailed my battle with trading stress in another article. Still, I have concluded that even a little stress is too much. So, after some reading on the topic, I decided I will simply let go of it.

Yeah, right… that word simply doesn’t seem to fit a task like that. It is a sort of zen paradox, that it takes literally no effort to drop our attachment to things beyond our control, and yet at the same time it is very difficult to do so. So, in preparation for this week, all weekend I have been practicing getting into a generally zen mindful state. To me, it feels like an extension of meditation.

I am a long-time meditator. I started out meditating on an object, or a piece of music–just anything I could attempt to focus on completely. Eventually I “graduated” to letting my mind stand still, and empty. I think this is generally considered to be a much harder type of meditation to do. At least, I can say it was very difficult for me, and sometimes I still have to start with an object and work my way up to it.

The reason I bring that up, is that what I’ve been practicing feels to me like I’m meditating all day. I’d say it’s really great, but I’m not supposed to label things! :-) I focus entirely on the present moment, and just do whatever it is I am doing. I experience it as fully as I can. No distractions. No multitasking. No “chatter” in my head about the past or the future. No “chatter” in my head about labelling the present. I definitely did not achieve 100% mind purity, but there were stretches of time where I “got it.” Interestingly enough, I’m failing at it right now, because the way I write is mainly by filtering and critiquing some directed mental chatter. Oops! See how I give up my inner peace for you people? :-)

Two books that really helped me understand these concepts are Practicing the Power of Now and the rather unfortunately named Complete Idiot’s Guide to Zen Living. Of the two, the guide is more comprehensive, so it might make sense to read it first. On the other hand, I read Practicing the Power of Now first, and found it to be the more inspirational and exciting book. You might say, inspirational and exciting enough to make you want to read more books on the subject. I didn’t link to it because I can’t find it on amazon, but I have the audio book version, and I listen to it every month or so while taking a long walk. It’s good stuff, but I’d always thought of it as an aid to meditation until now. Now I am approaching it as a way to be.

I have said before, and see others claim, that meditation is great because of the way the peaceful quiet mind allows them to get reset, refreshed, and re-centered. Well, why partition your time so that you only have that for a few minutes a day? Why not just have a peaceful, quiet mind all the time? Why not just be centered, rather than have to periodically get re-centered? It seems kind of obvious to me now.

I will say, as with my early experience with meditation, it’s not particularly easy at this early stage. I have found that when I slip up and let my mind start wandering, it seems to wander extra hard (if that makes any sense). Also, when a negative thought creeps through, it seems to have extra force, or feels stronger than I think it should have. That could be either a kind of mental pressure building up, or it could just be that it is more jarring to my internal state compared to the quiet I just had. I can’t tell. Regardless, I believe that, as with meditation, it will soon become second nature. I just have to stick with it for awhile.

“I need a drink.” And I didn’t mean water… Breathing quick and shallow breaths, I made futile attempts to massage out the tension in my neck and shoulders. My shoulder muscles in particular were burning from the prolonged strain. My fingers were tapping nervously on the table almost as fast as my heart was pounding nervously in my chest. As I hunched forward, the pin-point stinging in my eyes told me I had forgotten to blink for too long. Was I diffusing a bomb? At gun-point? Nah… just tradin’ some stocks.

This is the third installment of the Evolution of a Trader series. It’s a series about important learning experiences I had while developing as a trader. I spent a lot of money on these lessons… I hope you don’t have to! If you are new to the series, you might want to check out the other entries.

The Ideas
The opening paragraph is no exaggeration. I used to be a real mess during my trades. Around November of 2005, when I used to hang out in trading chat rooms, we all used to joke about the stress of trading. We’d say “looks like the markets are calling for the hard liquor today,” or the classic “looks like I picked the wrong week to stop sniffing glue.” At least, I hope we were all joking. It was fun to chat about, but the stress was very real, and clearly not healthy.

As soon as I put on a position, I would immediately grow tense and fixated on the chart. Even when the stock had moved in my favor, I was just sick watching for any sign that I should get out. So, I started looking for ways to counteract the problem.

I’m not ever content to just theorize… I prefer to try things out, even if they seem ludicrous. Some ideas I tried include:

• Stretching and light aerobics before trading. This way, at least my muscles were loose and relaxed prior to the stress onslaught. After a few minutes, though, that benefit was long gone.
• Stretching and light aerobics during trading. I had some success with this, but it kept me from doing any real typing while trades were on, which hurt my productivity. Also, I was still under the same amount of stress; I was just channelling the energy a bit.
• Moderate alcohol consumption… as in a couple glasses of wine early in the trading day. What can I say… I guess we joked about it until it started to sound like a good idea! I found that I could get just as worked up during the stressful times, so it didn’t really help. Worse, during the boring times, my attention would drift. (an aside: I had this cabernet last night, and thought it was pretty good)
• Meditation. I did this already, but at night. I tried fitting in some meditation before the trading day, to see if that would help. Like pre-trade stretching, this helped me go into the day nice and relaxed, but the effects wore off pretty quickly.
• Listening to music during trading. I tried a variety of styles, with no discernable benefit. During a stressful trade, I was tuning the music out. During the boring times, it was a distraction. Also, a big part of my trading style back then was watching the tape, and getting in synch with the action. I found that music interfered with my ability to do that, because I would inadvertantly correlate the ebb and flow of prints with the rhythms in the music!
• Trading in a massaging chair. I found that, when stressing out over a trade, the little massaging motors were more painful than soothing. But, when not trading, I love that thing.
• Trading on more sleep, and less sleep. The ideas were “I’ll be fresher,” and “I’ll be too tired to care,” repectively. Wrong, and wrong.

How I Overcame My Stress
As usual, though, I was taking completely wrong approaches. I was attempting to treat the symptoms, and not attacking the cause of the stress and anxiety itself. I guess, at that time, I felt like tension and stress were a part of trading that needed to be accepted. After all, one of the traders in Stock Market Wizards had an aneurysm, and Pit Bull recounts Marty Schwartz’s trading-related health problems. I could cite several more examples. However, I no longer think extreme stress is a necessity.

At some point early in 2006, I happened to notice that I was under a bit less stress than before. Something had obviously improved, and that was the catalyst that got me really thinking hard about what could have changed. I tried to go from there to identify the real root causes of all that tension. Here’s what I came up with (this is an actual text file I saved off on my hard drive, somewhat edited for presentation here):

1. Too much focus on reward, too little focus on risk. One bad trade could erase several days of profits. (I’ll be making a subsequent evolution post to cover this topic fully).
2. Not enough confidence in the setups I was trading.
3. Trading too much of the noise, and not enough of the bigger stock moves

The big stress-reliever that I had already experienced came from addressing issue #1. I had recently achieved a much firmer grasp of risk:reward ratios, and the concept of risking a fixed % of current equity per trade (for more on these topics, see articles such as this one and this one, among others). By controlling and understanding my risk better, I felt more in control of my trades. I felt like my perfomance was more predictable. Therefore, less stress.

Items #2 and #3 were other stress factors I thought up in my brainstorming. It seemed reasonable that if I could systematically address these, I could further reduce the problem.

So, to improve my confidence in my setups, I implemented a backtester, and also started keeping close track of my trading expectancy. It is soooo much easier to face a trade that’s going against you, when you have some reason to believe that you will make the money back (and more!) soon, trading the same way. Think about that… that’s powerful knowledge to have. I also did more thinking and reading about the chart patterns that are the basis for a lot of my trades. I tried to gain a deeper understanding of the market mechanics that make them work. I find it’s easier for me to trade against what I think market participants are doing, and harder for me to trade against what looks like a “head and shoulders” shape on a computer screen.

Over time, I came to realize that Item #3 (regarding trading noise too often) was a valid concern. Really, it’s a close relative of Item #1 (poor risk control). I still, even today wake up sometimes with the notion that I should throw some money at the opening volatility. I wake up literally imagining the killing I could make, in detail. I guess the memories I have of making $1200 in a couple seconds are just too sweet to kill. On the other hand, I have to look at my old trading records to remind myself that I lost $2000 or more just as often on the same silly trades. Selective memory is deadly! But, aside from that, I was making a lot of trades with a goal of picking up a few cents on a wiggly $90 stock. That’s a miniscule move on a $90 stock, and can happen at random, in an instant. It was too unpredictable, and too hard to control my risk properly. My expectancy record keeping made it clear that I had to stop making trades like this. Though they don’t spark my imagination like those opening-minutes trades, I still want to trade noise sometimes, too. But, I know better now, and I have the facts to back me up, so I can resist.

Making these adjustments, and working on my overall workflow so that it fits my personality better, has dramatically reduced my in-trade stress. I no longer feel like I am doing myself physical harm by trading. It’s also just a lot more fun, this way!

Summary
I think a lot of beginning traders feel like high stress is an unavoidable cost of doing business. To some degree, trading is going to be stressful, true enough. However, if you have a stress level anywhere near what I described above, you need not suffer through it. In my case, it took me a long time to realize that I could attack my stress, head-on. You don’t need to wait like I did. Get to the root cause of your tension, and address it. I would wager that in many cases it boils down to the same two issues I had: a lack of confidence, and poor risk control.

“Ok, you wanna go up? Fine! Let’s go up!” It was December 29th, 2005, and I covered a losing short on Energy Conversion Devices, Inc. (Nasdaq: ENER) for a loss of $166. I had other losing trades in motion on Alkermes, Inc. (Nasdaq: ALKS) and Under Armour Inc. (Nasdaq: UARM), and the day was running out of trading hours. I needed to recover, and fast.

This is the second installment of the Evolution of a Trader series of articles. It’s a series about important learning experiences I had while developing as a trader. I spent a lot of money on these lessons… I hope you don’t have to! If you are new to the series, you might want to check out the introduction article, and the first installment.

Trading Loss Recovery Tactics

Continuing with the story from the first paragraph, I didn’t want to finish the day in the red. ENER had turned up as soon as I had gotten in short. It was especially hard to watch, because I had already pinned my hopes of making up for my other losses on this ENER trade. It wasn’t going to work! So, I reversed my position and took a $166 loss in the process. “Fine, let it go up,” I thought. “At least now it’s going in my direction.” Not only did I reverse the position, but I bought 5 times as many shares as I had sold in the short position. I should hardly need to tell you that it promptly started falling. I lost an additional $669 on the long trade.

It’s natural to want to end every day in the green, but like many beginning traders, I had all the wrong goals, and took all the wrong actions. That ENER fiasco was just one example, and unfortunately there are many in my early career. Here are some things I’ve done in the name of loss recovery, at one point or another:

• I held on to a winning trade too long because it had not yet made enough money to cover an earlier loss. “C’mon… Just a little more… I have $500 losses to make up for…” This line of thinking creates an irrational tie between the performance of one trade and the performance of another. It causes you to ignore your trading plan, and can not only reduce profits, but even turn winners into losers!
• I jumped out of a winning trade too early because it had made enough money to cover my earlier loss. “I can’t risk going red again for the day.” This is a variaton on the above irrational thinking. If the trade is still good, don’t alter your trading plan.
• I overtraded to make up losses by the end of the trading day. “This isn’t the best setup, but it’s almost 3pm, so…” If you get fixated on getting back into the green by 4pm, desperation can make bad setups seem good.
• I traded too large a size so that a trade’s likely reward would cover my losses. “Let’s see… I need to make $500, and I can maybe get 20 cents… so I’ll buy 2500 shares.” That’s ignoring the proportionally larger risk, of course. I don’t have to tell you how this turns out, do I? I did this in the ENER example above.
• I traded for revenge. “Revenge Trading” is when you trade the same stock that you lost money on, but you are so focused on “beating” the stock, that you lose some or all of your trading discipline. The hasty long/short reversal from the example is a kind of revenge trading.
• I associated new trades in my mind with the hope of making up my losses. From the start, this puts emotional ties on the trade, and it exacerbates all the other items on this list. Any book will tell you that “hope” is a four letter word in the markets, but I bet every trader in existence has fallen prey to this illness at some point in their development.

I’m sure a lot of aspiring or beginning traders will read through this list and laugh. Of course they would never do those things. When you read them in a list, they do seem like stupid thoughts to have at all, much less act upon. But, when you are down thousands of dollars, and you have bills to pay, and you know that so-and-so is going to ask you how the day went in a couple hours, and they obviously already think you are an idiot for trading stocks in the first place, and you’d really like to impress them… well, somehow your brain manages to blind itself to anything but the possible upside of plans like the ones above. If not, you are luckier than I was! On the other hand, if you do find yourself having thoughts like these, I hope they’ll seem familiar from this article, and you can avoid my mistakes.

The True Nature of Recovery

Eventually, I had a revelation. “Recovery” is not an action that you take. It’s not a course of action you can plan. It doesn’t even have anything to do with your account balance, or whether the markets are open. Recovery is a state of mind.

Specifically, it’s the state of mind you were in before the loss. Think about it… If you have a positive expectancy (and a reasonable win rate), you will make back more money than you lost before long. At least, the odds are overwhelmingly on your side. And you don’t even have to do anything special. The only part of the bargain you have to hold up, is you have to trade the way you did when you measured that positive expectancy. When you focus on the loss, or attempt to take an action that you think of as “recovery,” you are making adjustments that put you in a state with unknown expectancy. The type of changes a beginning trader is likely to make will almost certainly lower his or her expectancy, if not make it negative. And off they go down the spiral of further losses and more urgent recovery “plans” and “attempts.”

In Jack Schwager’s The New Market Wizards: Conversations with America’s Top Traders, Linda Bradford Raschke says “It never bothered me to lose, because I always knew that I would make it right back.” If you measure your performance, and you have a reasonable system with a positive expectancy, you could make the same statement.

So, in a very zen way, the moment you stop trying to recover is the moment you will succeed. I can now say I’ve recovered from my latest loss without having made back a dime yet. Sometimes I need to take a walk. Sometimes I need to take the rest of the day off. I don’t trade again until I’m mentally back to where I was, pre-loss. Over time, it has gotten much easier to get there.

An Aside: Mental Discipline

A lot of the pitfalls that Type 1 and early Type 2 traders fall into really boil down to a lack of mental discipline. The thoughts I listed above may lead to counterproductive trading behavior, but they are all rooted in perfectly natural human emotions and dispositions. For me, they key has been to stay aware of my thoughts. That way, when I have counterproductive thoughts, I can recognize them for what they are and dismiss them. They still pop into my head today when I’m trading in the red. For instance, during my trade on United States Steel Corp. (NYSE: X) this week, I found myself watching the dollars of profit, waiting for it to surpass my earlier loss on CSX Corporation (NYSE: CSX). I quickly noticed and forced my attention back to the quality of the price action. Problem averted.

Reading trader blogs, I’ve noticed that several of us are into meditation, and I don’t think that’s a coincidence. A lot of people think meditation is for relaxation or spirituality, but first and foremost it’s about mental discipline. At the beginning, it’s actually really hard work! Being able to observe your own thought stream passively, and stay entirely focused on one thing for minutes on end, are excellent skills for any trader. I recommend that all traders try it.

Summary

That number on your trading platform screen isn’t labelled “Profit/Loss/Drawdown/Recovery,” is it? Of course not. Actions you take only result in profit or loss, plain and simple. Everything else is really just your mental picture of your equity’s health. If you let that picture alter your trading decisions, you are entering a zone with unknown expectancy, and will probably suffer for it.

Stocks Mentioned In This Article
Stock	Links
ENER	| |
ALKS	| |
UARM	| |
X	| |
CSX	| |