How to deal with a bad trading period – My 10 most practical tips

Dear traders, 

My latest blog comes in response to a question I get asked all the time by those I mentor – How do I deal with a bad patch? So I thought it a good enough reason to highlight the many ways I have dealt, and continue to deal with bad patches in my trading. I am sure there will be something within the following article which you can use straight away and get great benefit from. Continue reading to find out more…[subscribelocker]

But why is it important to have some techniques available to us to deal with bad trading patches? Well the first thing we need to identify and accept is that all traders have a period where they don’t do as well as they had hoped and give money back to the market. It is an inevitable part of trading and therefore we must prepare ourselves for it. Secondly, how we respond to a bad patch can have either a positive or negative knock on effect on our future performance and can literally make or break a traders long term (12 month) performance. Managing our ’emotional state’ is a discipline and an art that can only really be improved by physically trading. 

I suffered heavily from poor emotional responses when I first began to trade, getting angry and blaming everything and everyone but myself, getting fearful of losing more money, getting disappointed in being wrong (hard for a bloke especially!) and the most infectious part of this was that this mindset infiltrated my future trades and as you would expect, a temporary bad patch then spiraled into a snowball of further losses. A vicious circle and one which is so easy for a new trader to get into (I always talk from a position of experience) but the good news is that it can be managed so we don’t let it hinder our long term performance. 

Emotion will never leave us. I still get angry, fearful, disappointed to this very day, but I have been very rigid in implementing those techniques you will read about below to help me overcome potentially damaging emotions. They help me to reduce the sensitivity of my emotions so that even though they are there, they don’t impact me like they did when I first began. 

Don’t expect these techniques to work wonders overnight, however do expect them to work brilliantly once you start to implement them on a regular, sustained period. They are a massively important part of my trading armory and will become the same for you once you see the impact they have on your emotional state and therefore results. So without further ado, see below for my top 10 tips for dealing with a bad patch in your trading (in no particular order of importance, find what works best for you): 

1. Always think of the bigger picture 

As a day trader, you can often become very disappointed with a losing day, week, month. This is thinking too short term. Think about a larger time frame such as 6 and 12 months. This gives you the ability to accommodate good and bad months and finish out on top. The best illustration I find is with a football season. The team who finish at the top were the most consistent over 40 odd games. They would have certainly lost games and had bad patches but their consistency over a longer period of time was the best to see them to the top of the tree. 

2. Remind yourself of your purpose / your ‘why’ 

Motivation can wane after a bad patch. Always keep close at hand the strong reasons WHY you are doing what you are doing. It is an incredible source of positive energy and motivation. Keep this close to hand so that you have a daily reminder of your purpose. This will start to melt even the frostiest of times in the markets. 

3. Do some back testing 

For some reason, I come across many traders who see a losing patch as the end of the road for their strategy. This should not be the case in most scenarios. A trader should know the normal parameters of a strategy and especially so the worst case draw down/number of losing trades expected. If you don’t, be sure to go back 6-12 months in time and back test your strategy. Firstly to ensure that it makes money over a long period of time and secondly to know what the worst patch was during the back test. For example if your strategy made +30% in 12 months but during this time had 7 losing trades in a row, you then know upfront the worst case scenario. If this arrives, you expect it rather than run a mile from it. 

4. Ask for some external advice 

I would advise here using a more experienced trader. Speak to them about how you react during a bad patch. Their calming influence, understanding of what you are going through and advice can provide the boost you need. 

5. Drop risk size until confidence returns 

Inevitably a bad patch causes a financial loss which stimulates fear of losing more. Being brave and trying to continue when you clearly feel fearful is often the worst decision to make. Drop down your risk size on each trade so that it is mentally easier to accept taking another trade and then build back up to full position size once the profits start to return. 

6. Note down your emotional state 

The hardest thing for me to accept in the early days of my trading was admitting I was trading emotionally. I saw this as a sign of weakness. In reality it was a sign of ignorance. When I started to identify the emotions I was going through, I could then work on them. If you don’t admit your challenges, you will never be able to overcome them. 

7. Trade with a buddy 

Trading alone can cause you to sink into your own negative thoughts after a bad patch. Find a positive buddy you can bounce off, who can provide that daily support, who you can talk to about the challenges you face. Also by reciprocating this you will find that you begin to take a more constructive mindset to a bad patch as you have the peer pressure of being a strong support to your buddy. 

8. Put things into perspective 

It always makes me smile when I hear that even though a trader has had a bad patch, they are still up +20% for the year. Always compare your returns to every other investment out there and you will be pleasantly surprised. Even if you averaged just +1% per month, you are crushing most other investments from an ROI perspective. 

9. Read inspirational case studies 

One of my greatest sources of motivation and inspiration came from reading about how some of the best traders in the world had some incredibly tough times in the markets. But they still came through it all, making astonishing returns. My favorite books are Market Wizards and New Market Wizards (click links to go to store). Truly inspirational stories and a great way to feel that nothing should get in your way of becoming the very best trader you can be, especially not a few emotions 🙂 

10. Plan ahead for how to deal with the next bad patch  

This will come in line with back testing. The first thing to do is know what is a ‘normal’ or ‘expected’ bad patch and then give yourself some ways of how to deal with these times. It sounds a little strange to ‘plan for a bad patch’ but as a trader we have to expect them and therefore we should plan for them so we are in the best position to deal with them positively. 

Take away what you will but I do sure hope some of the above will help progress your trading even further. 

To your continued trading success, 

Tom

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2 Comments

  • Gavin Kingcome

    Thanks very much for this. This is full of really helpful and constructive advice.

    Reply
    • Tom

      I’m sure you will only need to use it on the odd occasion mate 🙂

      Reply

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