SD Trader left this comment this morning:

I appreciate the overview of your daily trading. It appears you have quite the set up over there. How long did it take you to start trading successfully (and consistently)? I have tried to look this one up in the archives but it appears once you left your old job you have just always been great, even though you are still getting better. I wish you continued success and I am trying to learn from you as I have been reading for several months now.

I have a problem though and it is killing me. I have had several nice gains but I am not good at losing. I tend to move my stops and hold onto falling stops. For some odd reason the further down it goes after this mistake the longer I hold…you can see the cycle here. It is a painful lesson to learn as just two of those losses put me back to break even after a long decent trading run.

Do you have any advice on how I can kick my addiction to falling stocks?

Like I said this morning, I could write a book in response to this but I’ll try to keep this brief. First, I certainly wouldn’t say that I’ve ever been a great trader. What I have been, for the most part, is disciplined. But I’ve had my slip-ups and challenges and there are plenty of examples of that in the archives. Just a few of which are:

Consistency is something that I’m still striving for. I’ve always had some good runs, some (too many) flat periods, and drawdown periods. It’s tough to answer your question about when I first started trading for a living. During the first six months (May - October 1999) I’d been up about 20%, down 20% and was back to the flatline. I hadn’t taken any profits out of the market when I was up. Needless to say I was ready to quit trading and go back to work but just then the market took off. Luckily I was too ignorant to know that the market was going up too fast and I ended up making a killing over the next few months. I had a few weeks in which I made greater than 50%. Thanks to some advice I’d taken from one of Tony Oz’s books I’d also started to pull my profits out of my trading account at the end of each week. That banked money is what allowed me too keep trading through 2000 because I took my share of losses and didn’t make a dime for the rest of the year once the bubble popped.

What I learned from that first year was how much the market’s action impacted my results (duh!) and that money management was critical. Trading with the trend, if indeed there was a trend, was essential. What’s helped keep me in the game this long is the ability to recognize when the market was right for my style of trading. Just knowing when to stay out and preserve capital is a major advantage. (Like right now, if you’re an intermediate-term trader who only goes long you should probably be on the sidelines.) Much of my frustration with swing trading is how choppy (trendless) the market had become. I was finding more and more reasons to stay on the sidelines. That’s not good when you have bills to pay.

So on to your ‘addiction’. I’m no psychologist but it seems to me that you’re just not comfortable taking losses. The way I see it you have two options:

  1. One sure way to prevent losses is to stop trading.
  2. Recognize and accept that trading is nothing but a game of probabilities. You’re going to be wrong x% of the time so your goal should be to lose as little as possible on the losing trades.

Assuming you opt for choice two the best thing I can recommend to read and reread (and then read it again!) “Trading in the Zone” by Mark Douglas (or some other book on trader psychology). I read that book a couple of times a year. It does a great job of showing why it’s critical to accept the risks of trading. One of my favorite passages from the book is:

If you are unable to trade without the slightest bit of emotional discomfort (specifically, fear), then you have not learned how to accept the risks inherent in trading. This is a big problem, because to whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully.

I’m not quite that robotic — losing trades don’t feel good. But at the same time I know from experience that big losses hurt more much than small losses. You have to get comfortable with the small, acceptable losses.

That book may also help you figure out why you’re having trouble keeping your stops. Is it that you’re playing with the house’s money? Can’t stand to be wrong? Have fallen in love with your stocks? Do you simply like pain?

Some additional things that may be helpful:

You obviously know what the problem is, the issue is getting the discipline to solve it. Somehow you’ve got to convince yourself that taking large losses will take you out of the game — preferably before you learn that by experience.