Awareness and Taking Losses

Most of you probably showed up to read this post expecting something about the markets.  Maybe you’re hoping for some sort of perspective on the recent environment.  My guess is that you’re wondering what I think, how I’m managing positions, and what I’m anticipating going forward.  Today we’re going to talk about something else.

As we wrapped up the month of April, the sample account took another loss.  Once again, due to RUT.  When you take two monthly losses in a row with a high probability trading system, it stings a bit.  My goal is always to accurately represent what I’m doing and not pretend to be some guru with a 100% win rate or who conveniently fails to disclose trading results.  I firmly believe in honesty and transparency rather than deception or what you’re hoping to hear.

Armchair traders will say that we should change our strategy or not have been trading the strategy, but changing strategies every time we lose means we effectively have no strategy.  Additionally, knowing when a strategy will work or won’t work is 100% impossible unless you’re Goldman Sachs, the Fed (arguably the same as GS), or a high frequency trading firm.

The goal of any positive expectancy trading system should be to preserve capital when the system isn’t working so the account has the opportunity to capitalize on a more favorable environment.  Trading is a game of chance and that means the outcome will vary.

The start of 2016 has been challenging for many, if not most or all, non-directional options traders.  Rather than say we should jump to a new system, revise our methods, or question the world, we need to step back and pause.  Sometimes trading is about taking managed losses.  This post is a little bit about that and, of course, a few other things.

“Why” Needs To Change . . .

When I started trading in my late teens, I was immediately sucked in.  I became obsessed with figuring out a way to become an exceptional trader because I believed it would satisfy my insatiable cravings for money, power, and control.  At the time, I was pretty deep into Objectivist Philosophy and a desire to dominate the world through productive achievement seemed like the highest and best purpose of life.  I’m not saying that’s good or bad, it just is.

In the past month or so I’ve had some life events come up that have caused me to pause and think about “why.”  For example, why are we trading, why do we want to succeed at it, and, hell, how does it help anyone.  I know trading can seem like a selfish objective and not everyone wants to give back, but I do care about humanity and seek to contribute to the world in a positive way.

On a really basic level we do everything to satisfy something.  We shower because we want to be clean, we eat because we’re hungry, and we trade because “X” where “X” is the reason you trade.  Superficially the reasons we do things seem to make sense and we conceptually understand why we’re taking action.  Other things are less clear and we do them without a strong awareness of why we’re taking action.  To complicate things further, we do many things thinking that we’re satisfying something when, in fact, we’re not really aware of the reason we’re acting or we’re attempting to satisfy something other than what we think.

In order to achieve higher levels of competence, it’s essential to understand why we’re taking action and what we’re hoping to accomplish.

Many traders, obviously myself included, begin trading because they want to make money.  We’re all told that making money trading is extremely hard, but the potential for success requires us to believe that those stories don’t apply to us.  In other words, we want to believe we’ll be the exception or we’re “special.”

When we begin trading to make money we’re starting from the wrong place.  In doing that we’re expecting money to bring about some outcome.  What we’re really hoping is that money will make us feel secure, free, or something else, but, generally speaking, feelings can’t be bought.  Ultimately, we need to understand our own “why” for trading because it’s the only thing that will carry us through the rough periods and I promise you many times over that there will be rough periods.

Side Note:  Most of us have been conditioned from a young age to believe we’re special so believing anything different requires some conscious effort.  Keep in mind that I’m not suggesting that you’re not special.  Only that it’s good to be aware of our underlying beliefs and how those beliefs shape our actions.  For now, let’s ignore the fact that some people don’t actually want to be successful in trading even though they might say they want to be successful.

How do you get to why?

Long term success is frequently build on understanding why we want something and developing a process that fits our personality.  I’ve spent years reading books, talking to other traders, and observing successful and unsuccessful traders.  All successful traders develop a process that fits them and none of them are given that process.

Why is a really fundamental question and something I can’t answer for you.  Additionally, why is often something that is answered over time.  When we begin doing anything we can’t expect to immediately be excellent at it.  New traders ignore or refuse to believe that fact, but, seriously, it’s true.

Getting to why (in any activity other than riding a bicycle) is always a slow process for me.  Competitive endeavors stir up a lot of emotions for me around wanting to excel and never feeling “good enough.”  For me the process of trading has largely been about continually seeking improvement and wanting to understand myself.  While that sounds touchy, feely and like it’s a great experience, the process can hurt like hell, cost money, and be a very rocky road.


My suggestion is that if you’re trading solely for money, you should pause and try to understand why you want money.  You don’t need the answer this second, today, or even next week.

When we’re only trading for money, we’re hoping money will solve something for us and, more than likely, it won’t.  When we evaluate our self-worth based on our outcome or P/L, we’re measuring ourselves against a standard that we can’t control.  Ultimately, we need to shift our focus away from money, the outcome, and towards the process.  The real question we need to answer is why we want to follow the process rather than why we want to make money.

Additional Reading:

A while back I wrote this post on Meditation and Incantations.  Some of you really liked that post and some of you really hated it (as measured by a higher than normal loss of email subscribers).  Very few readers seemed neutral which is interesting because the suggestions are intended to bring us to a more natural way of being.  I’m a very non-spiritual, non-religious person and I still find value in the suggestions.

One of the reasons I’ve found meditation helpful is that it increases awareness.  When we’re meditating we’re not necessarily trying to block everything out, we’re simply observing thoughts and attempting to refocus.  In trading, erratic market movements and prices are similar to our thoughts.  The market can be really wild, really calm, or somewhere in between.  We can choose to observe that activity and bring our focus back to the process of positive expectancy trading.

A good friend and fellow trader Jonathan runs a meditation blog that’s also a great jumping off place if you want to read more on meditation.