Today’s guest post is by Tom Morton. Tom started his career at the Chicago Mercantile Exchange in 1996, working in the Eurodollar futures pit, then moving to the Nasdaq 100 pit in 1998. In 1999, Tom left the floor and began building a successful career trading individual equities. He is the co-founder of The Equities Room.
Trading on Tilt is something that just about every successful trader goes through from time to time. It’s basically a disruption of the normal discipline and trading style that had helped a trader find success, causing him to make irrational decisions.
For me, I think it is important to understand how and why tilt happens so that I can help prevent and/or limit the damage it can cause the next time it rears its ugly head, which is part of the process of becoming a better trader.
With that in mind, let me illustrate one of my first experiences in trading on tilt, which I lovingly call….
“The After Hours Fade Trade Gone Bad”
For a bit of background, I had been trading for a number of years, made it through the dot-com crash and had started putting up some pretty consistent numbers month over month and year over year. I was confident in my own style and ability as a day trader, and I had been coming off an especially good run of late.
I had no qualms about trading after hours earnings reports, as I usually kept my share size small and was able to capitalize on the wide spreads and overreactions in stocks that had released earnings reports.
One day, I happened to see that $CREE had come out with an earnings report that read, (I’m sort of paraphrasing here, but this is how I remember it), ” in-line EPS and Revs for the current quarter and guiding lower for the next quarter by a few cents.” I thought nothing of it, as it didn’t seem like a big enough beat or miss to get me involved in an after hours trade.
A few minutes later, my friend who was sitting next to me pointed out that it was trading a couple bucks lower…now down almost 15% or so. It seemed like an overreaction to a somewhat modest miss so I decided to bid some, a relatively small amount, due to the fact that it was a knife catch play and that we were in the thinly traded after hours session.
Immediately the trade was a loser, and the stock dropped another buck or so…and it did so with one single offer that kept refreshing and dropping his price. This is where my thought process on the trade first changed. My original little bottom picking scalp trade was now turning into a battle against this single seller.
“Once this offer leaves,” I thought, ”this should get a relief bounce…especially since its now down over 20%. Time to buy more.” I did, and wouldn’t you know, the annoying offer left and I thought I was in the clear. The stock immediately jumped back up a bit, and had I been offering out, I may have been able to come close to breaking even.
Honestly, I can’t remember if I didn’t exit the trade there because I was being greedy, or if it was because it happened quickly and I couldn’t get my offers out fast enough. Either way, the window of opportunity closed quickly and I didn’t get out, and that awful seller was back taking everything on the offer and dropping the price again to new lows.
Now, with a pretty big position on, and my P/L getting uncomfortable (nothing disastrous yet..but about equal to what a pretty bad day would be), I had a decision to make.
As you might have guessed, I made the wrong decision, and kept adding to the trade. Pretty soon, I was numb. I was trading a position size that I never would be in during the regular trading day, let alone the after hours session.
I began to justify what I was doing in all sorts of ways. First, my goal was to break even, then it was to get back ½ of my losses…by the end, I just wanted to see ONE STUPID UPTICK! The stock was now down 35+%, without hardly any sort of relief bounce!!! Unfortunately for me, it never bounced that afternoon and by about 6:00 that night, I finally dumped the position.
It was a killer loss for me. In one after hours session I had lost more than I ever had on a single trade or in a single day and had wiped out a month’s worth of gains. What started out as an innocent fade trade for a quick scalp had turned into my worst trade ever.
What I know now about my own trading psychology is that this scenario had all of the characteristics that are common in my trips into the “Tilt Zone.”
- First, I had been coming off a good run and was likely trading a little bit too confidently.
- Second, I scrapped my original trade plan and I tried to “out-think” the trade.
- Third, I ignored the chance to cut the trade when there was still a chance to limit the damage.
- Finally, the shock of the losses on my screen teased me into trading angrily and out of my comfort zone, trying to make up losses by adding bigger position size. It was a snowball effect of poor decision-making.
If I have learned anything in my years in this business, it’s that you need to be honest with and about yourself in order to have success. Though this was the first time I went on Tilt, it wasn’t the last time, but I do my best never to forget it, treating it like a scar, in order to remind me of some of my potential failings as a trader. By acknowledging and improving on those failings I have become that much better of a trader.
(Note: If you are new to my blog, I post about all sorts of things. Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades. Other times it deals with hot ex-porn stars who trade stocks. And sometimes it’s about how to avoid “suicide”. But a good place to start is The Best of bclund. If you like what you read, please tell a friend. If you don’t, please tell two friends.)