Dealing with Success and What Comes Next
…you’ve started to see some consistent growth as a trader. More winning days/trades, bigger returns per trade. You are starting to feel really “smart”. Maybe you start looking at your daily/monthly profits and extrapolating them out over a full year. Maybe you begin to think about trading bigger size and putting on more positions to amplify your trading profits even more. It all seems to make perfect sense… and its perfectly normal. Its how our brain works. Every trader gets to a point where after some success, logic tells them its time to take the next step. Unfortunately, this is where many traders lose it, When I say lose it…I mean that they start themselves on a different path full of bad habits that ultimately winds up ending their trading career. The failure rate in the trading profession is generally thought to be in the 90% range, and the root of that failure can often be traced back to how traders deal with their successes.
Why is this? How can it be prevented?
This happens for a number of reasons. One reason is, as traders find success, they try and trade bigger size and juggle multiple positions, often losing the ability to think as clearly as they did before. In short, they lose their comfort zone. What were originally patient, well thought out trades, become quick in/outs due to the traders’ shock at amplified P/L swings. This can lead to over trading and bloated commission bills, which eats into P/L and erodes confidence.
–When traders move up in size, and trade more positions, they need to do it methodically, so that it does not have a great effect on their mental state when trading. Ultimately, the move up in size and position count can be very beneficial, but traders need to fight the urges of greed that force a move up too quickly, which can take them out of their very important comfort zone.
Another reason traders go off the rails after finding success, is because they become blind to the reasons behind their recent success. They begin to confuse luck and circumstance with genius, and basically lose their fear of the market. Markets run in cycles, and will provide opportunity as those cycles match up with preferred trading strategies…but they don’t last forever. When this happens, trades begin to disconnect and frustration sets in. This lures traders in to bad habits like holding losing trades (or even worse, adding to losers).
-Traders need to be aware of the underlying reasons behind their success on the way up, rather than just looking at their recent P/L. Eventually they will need to adjust to markets as sentiment shifts. Most importantly, they cannot lose their fear of the market.
A final reason traders come apart after recent success is by chasing their own performance. They’ve begun to get used to seeing certain gains on their trades and have increased their trading goals. Unfortunately, they become unable to pull back the reins when things have stopped being so “easy”. They now will convince themselves to place trades in order to try and “find” money, instead of letting the trades come to them. Forcing trades in this fashion is a bad habit that can be hard to rectify.
-Trading returns over the course of a traders career will have peaks and valleys. They need to be aware of this, and adjust their strategies to ensure consistency to ride out the valleys, and avoid trying to force performance.
Finding success as a trader one thing. Maintaining that success is another. One of the hardest things to do as a trader is to deal with success and avoid the traps that lie ahead. It is especially difficult in our current market, when sentiment changes seemingly from day to day, follow through seems non-existent, and headline risk is everywhere. Knowing what obstacles are out there waiting is the first step in making sure that current success won’t lead to bad habits that can ultimately end careers.