[Note: This is the analog post to my recent “How To Master Trading Discomfort To Improve Your Results.” Traders will relate differently to each post, but the goal is to use the one that fits your personality best in order to improve your trading.]
I have to say that I really enjoy reading the comments on my blog. Instead of the usual trolls that tend to inhabit most public blogs, I seem to get a pretty cool mix of people who have something nice or useful to say. And sometimes a comment provides the inspiration for a new blog topic, like the one I got from “Alex” the other day on my “5 Rules For Trading A Reversal Hammer” post.
This is a good setup, I’ve seen it happen a lot. Usually I am on the side selling at the point when all the sellers are exhausted though.
I feel your pain Alex, cause I have been there a number of times myself.
I always remember the trades I lost big on or the poker hands where I got a bad beat because the pain of loss is more acute than the joy of winning. Pain makes more of an impact on me, which I think is just human nature.
Think about it. If you walk down the street tomorrow and ninety-nine people smile and say “hello” as they pass you, but one A-hole sneers and says, “what are you looking at jerk?” who will you remember at the end of the day? The ones who made you feel warm and fuzzy, or the one who made you say “ouch”?
Many of life’s lesson, both big and small, never really seemed to “stick” when I was younger until there was some pain associated with them. For example, pushing in a half opened tab on a beer can with your thumb is perhaps not the wisest move; yet I did it all the time in my younger days. That was until once while on vacation in Australia I tried to do it with a frosty cold can of delicious Victoria Bitter lager.
Pro Tip: Blood and beer don’t taste good together.
I often look at the small crescent shaped scar this incident left me with and remember what an idiot I could be (…okay, still can be) at times.
I know a lot of great traders who have a “zen-like” way of approaching the markets, and are able to trade pain free, but for the rest of us, pain can be used to make you a better trader.
The hammer reversal setup that Alex was commenting on was one I had read about and had been explained to me too many times to remember, but that is not what finally got me to understand it and how to trade it. It was being on the opposite side of that trade and experiencing the pain of getting in too early that finally rang my bell.
It seemed that just when I got to the point of max pain and finally closed my position out for a loss was when price reversed, which was just like dumping a ton of kosher salt into an already gaping wound. But that pain focused me, and each time it happened I figured out a little bit more about what I was doing wrong.
Even to this day, in a fast moving market where I am looking to play a bounce, I will sometimes take a very small position, as small as 25 shares, in order cause me a little pain. In this scenario, stop loss and risk/return concepts are irrelevant because the $ loss is so insignificant.
But it’s not the $ loss that causes me pain, it’s being wrong. A small position going against me, causing some pain, will once again focus me and makes me better able to find the correct setup to add to the tester position and make it a full position.
Pain is very powerful if you know how to use it.
If you are trading bad, racking up losses, causing yourself pain, don’t thrash back into the markets trying to make it go away, or throw your keyboard, or yell at your wife. Instead, don’t do anything; just hold that pain. Imprint it into your head so you remember what it feels like. And think of how nice it would be to avoid that pain in the future.
Now use that as motivation. Go through your trades tick by tick. Remember what your mindset was contemporaneously and identify flaws in your thinking and execution. Take each of your losing trade charts, drive your ass down to Kinko’s, and get them blown up and printed out. Mark these charts up and hang them right over your trading screen as a reminder of the pain they caused you and what you can do to avoid that pain going forward.
And of course the ultimate goal is just that; to get to the point where you don’t need the pain in order to trade successfully. But until that time, The key is not to fight pain, but to harness it and use it to your advantage.