How to Stop Boom and Bust Trading Behavior
In this article, we are going to cover how to recover after blowing up your account. Instead of providing a list of steps that are overly prescriptive, you can take away from this piece what you need to move past the pain.
The first thing I want you to do is to forgive yourself. You are attempting to tackle one of the toughest endeavors that few if any have ever been able to succeed from regardless of their amount of effort.
Now, this forgiveness cannot be as simple as you closing your eyes and saying, "I forgive you". There needs to be a symbolic gesture made in the fashion of a ceremony if you will.
For example, print out your statement and burn it before your eyes and state to yourself, "I let go of all the pain and trauma associated with my trades."
You could also write yourself a letter of forgiveness. Detailing the hurt and pain caused by poor trading decisions and then close the letter with forgiving yourself.
I know this can sound a bit touchy feelie, but you have to truly let go of the baggage before you can move forward. If you do not shed a tear, then you haven't dug deep enough. This process should bring about real emotion.
Review the Data
First review your data and a pattern will emerge. you will likely see one or more of the below.
If the pattern you see is losing trades across the board, then it's your strategy. You will need to dig deeper to see where you had a winner and where this winner turned into a loser.
The end game is to identify the profit potential in each trade. This needs to produce an actual number like 1% or 5%, etc. The point is you need to identify where you have the greatest likelihood of making a profit.
So, you review your trading data and you see many winners. You may see a win rate in the 70 percentile or higher. As the account grows consistently for a few weeks or months, you will then experience a major setback.
This results in the account taking sharp dives lower. You need to figure out how to limit this risk. The goal is not about making more but about focusing on not having a big blow up trade.
Every fiber in your being is going to want to push you down a path of making the money back and making the money back fast.
You first have to come to terms with the fact the money will take as long as it takes to reenter your life. You can't make the market do anything. Your only job is to capture whatever the market is offering on a given day.
If you are struggling with placing winning trades or avoiding the big loser, don't fund your account with your entire nest egg. Just focus on making small gains consistently.
Limit Your Number of Trades
Another ugly reality of blowing up an account is likely overtrading. This has to deal with the fact you were likely trying to make the money back fast and the only way to do this is to place as many trades as possible.
You can limit your trades by having a set number you execute per day. For me, it's two trades.
You can also limit your trades to the time of day to avoid scenarios where you are getting in over your head.
The last key to success is to pay yourself on a weekly basis. For me, I take half of the profits out after each successful week. This feeling of paying yourself will feed your account and shift you away from a mindset of endless greed and towards one of steady profits.
Not only will you feel the benefits of your trading activities, but your family will also begin to see the fruits of your labor.
Trade Less Volatility
Trading less volatility is also another great way to reduce your risk of the big loss. At times, it could be nothing wrong in what you are doing, but you are just trading stocks that have swings that go well beyond your risk profile. The only way to eliminate the possibility of the big hit is to trade stocks with less beta.
You may be able to scale back up again to the stocks you prefer trading, but for now, it's about avoiding the big loss.
I used to love to trade the 3x and 2x ETFs but after a few of them got away from me, I had to forever remove them from my list. For you it could be penny stocks.
Whatever type of security exposes to you to too much risk - remove it from your list of trading options.
As traders, your goal is likely to make a boatload of cash. What if I told you your goal should be to not accumulate big losers.
Think of losers like how people in AA think of having a drink. Instead of obsessing over how much you made or lost in a day, begin to think of a winning day as a day sober.
Keep track of how many days you are able to consistently avoid placing a blow-up trade. For every 5 days, you are able to successfully go without a big loser, treat yourself to something that brings you joy.
This can literally be anything, but you have to reward yourself. This over time will change your outlook on what you think is successful trading.
Keeping this up day after day, week after week will ultimately lead you down a path of success. By simply eliminating the big losers, the trades will take care of themselves.
How Can Tradingsim Help?
If you are struggling with the boom and bust cycle of trading, you can learn how to curb this behavior by practicing to trade within Tradingsim. Take the time to better understand why you are allowing yourself such exposure that you do not adhere to your stops.
Also try different timeframes as mentioned by Nial Fuller, in his article titled '3 Ideas that Changed My Trading Career'.