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Trading Doctor- Danger of Trader Tilt

InvestorEducation / Learn to Trade Apr 18, 2008 - 08:57 PM GMT

By: Dr_Janice_Dorn

InvestorEducation Best Financial Markets Analysis Article
The day was more or less like any other trading day—full of thrills and chills, panic and elation, some "high-fiving" and some "what is happening here?"

Then he appeared. It was the first time I had seen him, but the look in his eye was familiar. It was not sad, not happy—just empty.


What could I say? His face, how he held his head and the way he quietly handed me the notebook said it all.

The first words he said were: "I made one trade last year and I am in trouble."

That got my attention. One trade in 12 months and in trouble was quite a different story from the one I usually hear. This was not the typical tale of the trader who laments over hundreds of trades, the inability to understand why they didn't work, and why the accounts were now in significant drawdown. 

One trade! I was very interested. 

“Why are you here about one trade?” 

He looked at me for a long time without speaking. 

“Well, it wasn't exactly one trade. It kind of was one trade, but I kept adding to it, so the trade got larger and larger. I kept doing options on the SPY until I had hundreds—hundreds of options on the SPY.” 

“So what happened?”

“Well, I knew what was going to happen. I read my newsletters, then followed the pundits and what they were saying. I had this trading system that I bought at a seminar. The system told me that things were about to turn around and if I just hung on, it would be OK.” 

You were in a losing position and you kept adding? Is that what happened?” I asked.

“Yes”, he mumbled quietly.

“And then what?”

“Well, after three months of adding and averaging down, I was so far down that I couldn't take the loss, so I kept adding.” 

“And then what?” 

“I couldn't take it any more, so I closed everything out for a loss.”

“And how much of a loss would that be?”

He swallowed, “It was 80% of my trading capital.”

“80% of your trading capital?”

“It was the worst thing that ever happened to me. I lost hundreds of thousands of dollars and now I am totally afraid to make a trade.” He went on, “I have not traded for six months and I am absolutely gripped with fear. Can you help me?”

“I don't know if I can help unless you are able to tell me what you did wrong?”

“What I did wrong?”

“Yes, what you did wrong?”

“I didn't get out when I SHOULD have?”

“Why not?

I didn't want to take the loss and I KNEW it would turn around, so I not only hung on but I kept adding. I was absolutely convinced that I was right. My indicators and the main guru I follow told me that it was only a matter of time, and that I really wasn't at a loss unless I took it. In other words, it was only on paper.”

“Only on paper?”

“Yes, it wasn't real because I didn't take it.” 

“And, when you finally took it? Was it real then?”

"Well, yes. Good Lord! It was so real that my wife threatened to leave me, called me a reckless gambler and threw me out of the house.” 

“Not a good thing.” 

“No, not good.” 

“So, what did you decide to do?”

“Well, at first I thought I could get even, you know, get back into the game and make back everything I lost.”

“And then?”

“I was in total paralysis, fearful and unable to trade. I still am. I can't eat, don't sleep well, my relationship is on the rocks, I have no faith in myself and I think I am becoming paranoid about people in the market being out to get me.”

Needless to say, this individual was in major trading tilt. What does that mean? He was, and is out of control. He was blinded by his own belief that he was right and the market was wrong. Despite glaring evidence to the contrary, he was unable to cut his losses. And, he kept adding to a losing position. He was trading on hope and belief and was oblivious to the reality of price that was staring him in the face. With each passing day, his accounts were in increasing drawdown and he became more and more crippled with fear. His self-esteem was failing and he was ashamed at his gullability, which then progressed to toxic shame. His relationship with his wife suffered in several ways, including some of the most intimate nature. He was paralyzed with fear and remains so to this day.

There are so many trading lessons here. The least of which is: no matter what one thinks, believes, hopes or prays, the markets can remain "irrational" longer than you can remain solvent. This is among the most difficult lessons to learn, but it is now, and has been since the beginning of market time, an eternal truth.

What happened here to put this man into tilt? Market opinions held in the face of glaring evidence to the contrary are among the largest sources of trading gone wild.

Yes - Trading Gone Wild!!! 

I have seen this over and over again—the inability to change quickly from bullish to bearish can. Just as in life, inflexibility and resistance to change is not rewarded, the same is true in the markets. The most successful traders are those who can adjust quickly between bullish and bearish trends, and who are prepared to do this within the course of minutes to hours. 

Adding to a losing position is another lesson. Unless one's pockets are deeper than the sea, cut losses short (and, of course, let winners run). Not doing this is a major root of tilt. Why? Because the trader becomes absolutely worn out by watching the weak position weaken more every day. In the markets, as in life, the weak get weaker and the strong get stronger. The gradual devastation of a losing position day after day, is among the most debilitating things that a trader faces.

What else went wrong? If there was a trading plan, it got lost. All the planning went out the window when the position did not "cooperate."

Why have a trading plan when you are unable or unwilling to follow it? What's the point? Trading is a business and a trading plan is just like a business plan. If you deviate from it, you better have a really good fall-back position or your business will go into Tilt–

I will write more about the reasons that investors cut winners short and let losers run. For now, suffice it to say that this is among the cardinal sins of trading, and has deep neuropsychiatric implications. 

Trading imitates life. You are your trade and your trade is you. It's that simple; but, clearly, not very easy for most. 

A few lessons to learn from this story:

  1. The market is always right--except at significant tops and significant bottoms.
  2. Keep an open and flexible mind. When in doubt, get out.
  3. Do not add to losing positions. 
  4. Try every day to make yourself stronger, better and more integrated as a person.
  5. Stay true to yourself. Lying to yourself and others, and trading on hope and prayer simply do not work.

Most importantly, accept and recognize that you are not perfect. You are human and are going to make mistakes. Trading is the only profession where losing is actually winning. BUT—unless you accept mistakes and learn from them, you will not progress. You will end up on the wrong side of tilt.

Unless you are able to get your trading brain out of the cave you will not accumulate regret, instead, you will be proud. It is only through the true acceptance of a mistake as a mistake that we accumulate regret. This is how we learn and grow as traders.

By Dr. Janice Dorn, MD, PhD
Prescriptions for Profits
www.thetradingdoctor.com

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© Copyright 2006-07 -- Janice Dorn, M.D., Ph.D. -- Ocean Ivory LLC

Dr. Janice Dorn is a graduate of the Albert Einstein College of Medicine, where she received her Ph.D. in Neuroanatomy. She did her postdoctoral work in Neurophysiology at the New York Medical College. She received her M.D. from La Universidad Autonoma de Ciudad Juarez, did one year of clinical clerkships in Phoenix, Arizona. and then completed a Neurology Internship at The University of New Mexico in Albuquerque. For the past twelve years, Dr. Dorn has focused her attention on trading, mentoring and commentary in the financial markets, with emphasis on Behavioral NeuroFinance, Mass NeuroPsychology, Trading NeuroPsychology, Futurism and Life Extension. A graduate of Coach University, she is a full time futures trader and trading coach.  Dr. Dorn is the author of over 300 publications, relating to Trading and Investing Neurouropsychology, Market Mass Neuropsychology, Behavioral Neurofinance, and Holistic Wellness and Longevity. 

Dr. Janice Dorn Archive

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