A study was done a few years ago where they measured two emotions in seasoned traders while they were trading. The first was determination (how determined were the traders to make profitable trades?) and the second was frustration (how frustrated were the traders at the same time?)
The study concluded that when the trader was determined and frustrated at the same time, they had an 80% chance of losing money during that trading that session.
I first came across this while reading a book, Trading for a living by Dr Alexander Elder. Dr Elder was born in Leningrad and grew up in Estonia, where he entered medical school at the age of 16. At 23, while working as a ship’s doctor, he jumped a Soviet ship in Africa and received political asylum in the United States.
His message of frustration versus determination has stuck with me ever since I read that book.
Let’s break down these two crucial emotions.
We are all determined to make a success and to generate profits through trading. It is largely due to this determination that we suffer from Fear, the fear of missing out, the fear of losses, the fear that a profit will become a loss or the fear of not having enough (greed). On the other hand, the determination to succeed is necessary to keep us motivated and dedicated.
We need to be aware of what causes frustration while trading, this can vary from individual to individual but for me it includes some of the following:
- From a cell phone call to a screaming neighbour to a nagging partner or even someone that is just trying to have a chat. They all qualify, especially when scalping the market where absolute focus is required.
- Stop losses. A good strategy is one that has a hit rate of 70% plus. This means that for every 10 trades I know and accept that I must have 3 losses. It makes me extremely angry when they occur consecutively. I am patient, I do not pre-empt, I stick to the rules and still, I get 3 or 4 stops in a row.
- Changing market conditions. Not all strategies work in all market conditions. We are aware that markets trend, retrace or consolidate and then trend again. Trending strategies do not work well in consolidating markets and strategies that work well in consolidating markets do not work well in trending markets. Over the past few months, we have had what has seemed like endless consolidations followed by a very quick spike (trend) followed by what has seemed like another endless consolidation, especially in the smaller time frames.
- Fundamental changes. In the past the NASDAQ and DOW were similar in the sense that If the DOW was bullish so was the NASDAQ, then switching happened. As an example, institutions were realigning their portfolios which required selling shares in the NASDAQ and buying shares in the DOW. Current performance has not been the same as historical performance. World markets have been reaching record highs. The result is we are so extended we become scared to go long and are constantly looking for turning points and trading against the underlying trend. The result is little follow-through in price action so stops become more of an occurrence than take profits.
- Recently, while trading with Sam one evening, we were both in the same trade, due to the time of the night we decided to exit the trade at entry. He managed to exit and as he did my internet dropped and I was down for over 15 minutes. Once connection was re-established, I found that I was over 200 points in a drawdown. In hindsight I should have just closed, I did not and that eventually became a 1500-point drawdown. (Please bear in mind, these are not excuses for a lack of profits but some examples of what causes me frustration.)
Overcoming frustration while remaining determined
In order to remain determined without becoming frustrated I try clear my mind before every trading session. This helps me find a middle ground or a neutral place within myself. To do this I remind myself of three things:
- Optimism versus pessimism. In other words, is a glass half full or half empty? Generally optimistic (glass half full) traders make more profits by buying or going long while pessimistic (glass half empty) traders make more money by selling or going short. We all have preconceived ideas about the direction of the market. This may be due to watching news, technical indicators, or listening to other opinions. We tend to look for trades in the direction we think the market is going and ignore the rest of what we see. I try to tell myself at the beginning of each session that the glass is empty, the market can go up or down and I need to trade in the direction it is going and not what I think it is going to do.
- Ask, why am I trading? If the answer is to make money, then it’s wrong. We spend time and money getting educated, then we gather experience, then we make money in our chosen profession. Trading is similar, lets learn, trade well and money will follow! My aim is to trade well, not often.
- Trading is like any business. Cash flow is king. No business is guaranteed that every day/week or month is going to be good or profitable. In no business is it guaranteed that market conditions won’t change, covid is such a good example of this. Trading is similar, market conditions do change and when they are difficult let us reduce position size and when they are good let us adjust accordingly.
Controlling frustration is paramount to me. I have some rules that I have set for myself. For example, two stops in a row, I stop trading and take a break. My equity curve drops by 5% I reduce my position size by 50% and will only increase it again once the high-water mark has been broken. When frustration becomes so overwhelming it often results in mental fatigue, I take a break, sometimes for a day or two – even for a week. That is where I am this week, trading quietly on my own close to the Grootbrak River. I am just fortunate enough that I have put in the time and effort to get to this point in my trading career that I can work where ever and whenever I want and so long as you put in the work and stay committed to this idea of becoming a full time trader, you do will get to experience such freedom.
Until next time, Happy Trading.