If you have lost money in financial markets, if you are questioning your future and perhaps even your life, this article is for you.
Many books and articles have been written about successful traders and investors and their distinguishing qualities. Shockingly little has been written about traders who don't find success. That is surprising, because research evidence suggests that the great majority of active traders are unsuccessful and persist in trading despite their losses. Even at hedge funds and other trading firms that offer mentoring and support for developing traders, I have found success ratios well below 50%. Quite simply, in trading as in fields such as athletics and the performing arts, many are called but few are chosen. Unlike in athletics and the performing arts, however, there are few avenues for continued activity for the average trader. An athlete unable to make a living from his or her sport can still play on a local team or at a local golf or tennis club. A performing artist may find gratification in community theater or in a local choir. Average traders lose money. They cannot sustain their activities, despite deep desires for success. All too often, when they lose and lose, they are left feeling like a loser. It's a dark side of trading that upbeat trading conferences and sunny trading coaches and educators don't acknowledge.
When Mark Ritchie, a well-known floor trader of commodities, wrote his book My Trading Bible, his original title was "How to Lose a Fortune and Avoid Suicide". His editors dissuaded him from such a grim name for his book, so he retained it as the title of his first chapter. What Ritchie understood is that losing at trading is more than losing capital. It can feel like losing all hopes and dreams. Even very successful money managers interviewed by Jack Schwager for his Market Wizards books, such as Paul Tudor Jones and Linda Raschke, report harrowing losses early in their careers. Little wonder that the subtitle of Ritchie's book is "Lose Your Shirt. Save Your Life. Carry On Trading."
But how do we carry on after sustaining trading losses? And is it even prudent to carry on? No brokerage firm, trading educator, or trading coach ever got rich suggesting to traders that they should no longer pursue their dreams. So the issue is swept under the rug, despite the fact that over 80% of active traders lose money in any given six-month period and rates of suicide rise after periods of stock market crashes. Still, it is possible to lose our shirts and save our lives. What follows are two helpful steps in that direction.
Step #1: Develop Your Life Outside Of Markets
What do basketball teams do when they fall behind and get into a rut? They call a time out. That gives them the opportunity to adjust and reset. Very often, not-doing precedes new doing. For the losing trader, new doing often means rediscovering life outside of markets.
In the book I'm currently writing, Radical Renewal, I explore how many trading problems--from overtrading to imprudent risk management--stem from the intrusion of our egos into sound practices. Once we become attached to our profits and losses, we make decisions reactively, out of that attachment. The stereotype of the ego-driven trader is the Wall Street "master of the universe" filled with self-importance and the sense of entitlement that can accompany success. When we think about it, however, the despair that can accompany trading losses is every bit as ego-laden as that stereotype. In both cases, we attach our worth to our net worth.
When we step back and develop our lives outside of markets, we reinforce the understanding that there is more to us than profits and losses. A beautiful footnote in Ritchie's book advises: "Recall the nicest feeling you ever had. You were given life for feelings like that" (p. 7). Those nice feelings are not random; they spring from our values and strengths. They are the result of doing good and doing things well. In stepping back from trading and reacquainting ourselves with what is meaningful and fulfilling, we directly experience our value beyond our profit/loss statement.
I am no stranger to this process. As I described in my first trading psychology book, my trading career began in the late 1970s and early 1980s during my graduate studies. I found success trading individual stocks and looked forward to a career grounded in that prosperity. Then came the great bull market of August, 1982, when I was leaning strongly short the market. I was slow in recognizing the sea change and months of profitability were erased in a few weeks. To this day, I can feel the despair and depression of that period. I can recall the periods of drinking too much, not caring about my appearance. It all came to a head in a bar in Upstate New York following drinking and smoking some adulterated weed. I was unable to function. I literally could not move from my seat. That was hitting bottom.
Fast forward to the following year and, scotch bottle firmly in hand, I attended a New Year's party for singles. I met someone who seemed special and fortunately was sober enough to keep her phone number. Thirty-six years later, we're going strong with kids, grandkids, and a raft of rescue cats. It took someone who saw my value to help me recognize it myself. Such is the power of relationships.
It turned out that full-time trading and investing wasn't what I was meant to do. Even when I was profitable, I missed the things that brought me to psychology: the opportunity to be a meaningful part of people's lives. Perhaps it's not coincidence that I became a performance psychologist for participants in financial markets. Stepping back from trading allowed me to find my own niche in the financial world.
Diversification works in our investment portfolios, and it works in life. When we have many activities and relationships that affirm the best within us, we are far more able to weather the inevitable ups and downs of financial markets. When losses in markets make us feel like losers, that's when we most need to step back from markets, engage life, and rediscover those "nice feelings" that make us who we are. Those feelings point the way to our future, whether it involves trading or not.
Step #2: Find The Right Resources
If and when you return to markets, you want to do it the right way. There are all too many self-promoting gurus willing to promise quick riches. The right resources are ones that mentor and guide, sharing hard-earned experience and role-modeling sound decision-making and money management processes. For those looking to learn from their losses and return to markets the right way, here are some of the valuable resources that appear in the book I'm writing:
- Trading communities - What a great way to learn from others and support each other. Online trading communities facilitate the sharing of ideas, but also include direct teaching and mentoring. Several worth looking into are Futures.io; Traders4ACause; SMB Capital; My Investing Club; Investors Underground; BearBull Traders; Jigsaw Trading; StockTwits; Seven Points Capital; and Edge Trading Group. These cover different markets and trading styles, so it is worth exploring which fit your needs and interests.
- Trading insight - There are many great sources of information available about financial markets and what moves them. Among those worth looking into are Abnormal Returns; Peter L. Brandt; Quantifiable Edges; AlphaTrends; All Star Charts; Bookmap; Chat With Traders; Real Vision; Dash of Insight; NewTraderU; Quantopian; and Masters in Business podcast from Barry Ritholtz. Many of these sites and services host their own communities; also check out their Twitter feeds. On the trading psychology side, my TraderFeed blog has well over 5000 posts dealing with everything from the psychology of markets to the psychology of those participating in the markets.
From the perspective of solution-focused work on performance, I encourage traders who have been losing to study, study, study their winning trades and winning trading periods. Very often, poor trading is mixed with good trading processes. The key is to identify what you are doing when you're trading at your best. It is difficult to focus on strengths after periods of loss, but it's those strengths that we ultimately need to build upon. The above resources are especially helpful if they enable you to more consistently tap into your best practices.
Successful trading presumes sound risk management, and this is true of trading and investing careers as well. We put our "capital"--our time and effort--into markets and need to give ourselves a finite period for things to work out or not. Making use of helpful resources will help you maximize the odds of trading success. If, at the same time, you're actively pursuing life activities that provide happiness, fulfillment, energy, and closeness to others, then you will be a success regardless of your market outcomes. As difficult as it can be, we want to embrace our failures, because those can place us on new and promising life paths. I couldn't see it at the time I was sitting catatonic at that Upstate bar, but long experience has taught me: setbacks are the first steps toward comebacks. The key is finding the worth inside of you that no market action can ever take away.
