The more I trade, the more I realise that making decisions under stressful conditions can be a real problem. We are programmed to believe that we need to work for the money that we earn and most experiences reinforce this idea of ‘the harder you work, the bigger the reward’. This is simply not true nor applicable to trading. Trading by its very nature is paradoxical. The point I am taking a very round about way to get to, is that sometimes you need to sit on your hands and do nothing in order to be rewarded. So don’t feel pressured to act when you are in a stressful situation.
As you know, I’ve had a bit of a bad run recently; but I’ve studied my trades and losses, and learned a few lessons from them. Firstly, I lost discipline at some point. I can almost see the tipping point where the trades got reckless and messy. Secondly, if I look at the trades on which I was long and banked losses on, almost every single one of them would have been in the money now.
It hurts my head to think about it, because the premise of my trading strategy that I had abandoned during this time of turmoil, was based on just this concept. The market moves higher over the long term and provided that you are invested in good quality businesses, you won’t really ever lose money as long as you have a long enough time frame and the capital to ride it out.
Sure, that statement makes a lot of assumptions, but I challenge you to go back and see how many of your long positions would be worse off today if you didn’t stop out six or more months ago. You will be hard pressed to find losers… except in the resource stocks, which is why I added the ‘good quality’ part. Furthermore, give those resource stocks five years and I’m sure that seven out of 10 will be trading higher than they are today.
So what does this mean? Well, it means that I abandoned a strategy right when I was meant to stick to it resolutely. Man I tell you, this trading game can be hard on the soul. Realising that you were busy doing the right thing, but you allowed fear to influence your decision-making and mess things up is truly gut wrenching.
On the bright side though, it also means that I have an opportunity to learn from my mistakes. I have seen a few flaws in the way that strategy worked, which means I can now refine it further. Then I can develop a more comprehensive set of rules that will avoid more deep drawdowns in future. So it’s not all doom and gloom.
It also means that I am susceptible to overtrading when I get stressed out. This is something that I am learning about myself (keep in mind that you pretty much learn new things about yourself every day in this game). What to do with this new knowledge, I don’t know yet, but I am certainly planning to learn from it.
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