7 Steps to Surviving a Trading Slump
“How you think when you lose determines how long it will be until you win.”
… Gilbert Keith Chesterton, 1874-1936
As if learning to trade wasn’t already hard enough…
If you’ve been in this game more than a few months you would quite likely have experienced a trading slump at some stage – a sudden or gradual loss of form which lasts well beyond what should normally be expected.
Missing setups entirely due to lack of focus… hesitation at entry … holding losers past their stop… all the while to a mental backdrop of doubt, frustration, anger, confusion, and continually negative self-talk.
Peak trading performance requires the trader to be in an optimal state – confident and focused, operating in sync with the market, with the ability to execute trades without hesitation.
What makes a slump so difficult to overcome is not just the fact that you’re in a sub-optimal state, but that the normal human reactions to the slump tend to maintain it or even worsen it. Continued drawdown can undermine your confidence and your motivation, leading to increased anxiety and continued poor performance. The process is self-perpetuating.
The markets are an unpredictable environment. Trade outcomes are never certain, and this naturally creates an environment of stress. If you’ve traded long enough to have some degree of success, then you will have developed ways to manage this stress and in fact may find it motivating. However when the stress increases to the point at which you start to doubt our ability to meet the demands of the trading environment, or to meet your expectations, you can find yourself very quickly digging yourself into a hole of despair, and a trading slump which if not addressed quickly could prove both financially and psychologically damaging.
So, what can be done to help us out of the hole?
1. Take a Break from Trading.
The first and most important action is to immediately break the cycle. Get away from the markets for a while.
It’s important to realize that any anxiety you’re suffering during a trading slump, is a normal human reaction. It’s your body’s way of dealing with the stress of the market environment and your perceived inability to meet its demands or your expectations – a part of your standard fight or flight response.
However the state of mind that results from this anxiety is not conducive to good trading.
So if you start to observe persistent negative thoughts, feelings or emotions, such as indecision, frustration and a general feeling of hopelessness, take immediate action to break this cycle.
Close out any open positions. Close down your trading platform. And take a break for a couple of days away from the markets. Rediscover the other priorities in your life – your family and friends.
An opportunity to relax away from the markets won’t solve your problems, but it allows you to place your trading problems into perspective. It’s not the end of the world. And this new, fresher perspective can then help you objectively identify and deal with the problem through other methods below.
Of course, it can be quite difficult to recognize a slump when you’re consumed by the anxiety and fear it generates, so I encourage you to consider objectively defining when and how you will force yourself away from the markets. Recognizing that a drawdown is one of the precursors to my entering a slump, my trading plan includes a requirement to take a break for the remainder of the session if I hit a certain level of intra-day drawdown. And similarly for an intra-week drawdown. I consider it like a stop-loss on the day or week. While I may not have yet entered a downward spiral of negativity and self-doubt, I recognize its potential to develop from this situation. The fact that I reach this level of drawdown is an indication that I’m not aligned with the flow of the market. So, it’s time to get out of there and take a break before the situation gets out of hand.
Professional traders are fortunate to have a Risk Manager who will inform them when it’s time to take a break. As a retail trader you’re responsible for implementing that function yourself. Be sure to place rules in your plan that tell you the exact conditions that require you to stop trading and take a break.
2. Discover a New Way of Looking at Trading Slumps
Jim Rohn says “Success is not to be pursued; it is to be attracted by the person you become.”
Trading success requires confidence. But confidence does not just come from knowing how to identify and act on good trading opportunities. It also comes from learning how to deal with adversity. It comes from facing a slump and working through the challenge to overcome it.
So, when you find yourself in a slump, embrace the opportunity. This is your chance for personal growth. It’s an opportunity to become a better trader. It’s an opportunity to establish a winning feeling, not a false one based on hope, but one with substance in which you know that whatever comes in the future, you’re ready for it and you can deal with it.
Enjoy the challenge.
3. Learn to Relax.
I find one of the most beneficial parts of my trading plan is that it includes a routine of relaxation prior to the session as well as exercises for maintaining a relaxed state during the session.
My preferred techniques are through the use of breathing exercises, as well as practice in Tai Chi and Chi Gung.
Learning to breathe properly is one of the simplest means of dramatically improving the quality of your life. As Taoist Lineage Master, Bruce Frantzis, says, “If there were only one thing I could do to help Westerners, it would be to teach them to breathe well.”
Of course, everyone will have their preferred techniques, so you need to find what works for you. You may prefer the use of affirmations and guided visualizations or meditation. You may find value in biofeedback techniques, as highly recommended by Dr Brett Steenbarger.
Some people surprisingly find physical exercise to be more relaxing, certainly in terms of providing an outlet for their stress.
Try several approaches, find what you enjoy the most, and implement a routine of relaxation into your trading session. Not only will you be trading in a better physical and mental state, but it will also increase the likelihood of you maintaining that optimal state when faced with increased stress, reducing the likelihood of entering a slump.
Likewise, relaxation is an essential part of your recovery process when you have found yourself in a slump. The physical and mental state that dug you deeper and deeper into the hole, is not conducive to working your way out of that hole. Relaxation is an effective tool for rapidly improving your physical and mental state.
Closely related to relaxation, is the highly recommended practice of reviewing your life to identify any external stressors. If your trading is being impacted by problems outside of the markets, then you need to take steps to manage these issues before returning to the markets. So, having relaxed, spend some time reviewing all non-trading aspects of your life, and deal with any family, work, financial or other stressors.
4. Use Your Journal to Monitor Your Physical and Mental State
A trading journal is a key tool in capturing a slide towards a trading slump, before it’s too late.
Most people seem to just record their trade stats – entry price, exit price and P&L. While this is nice, they’re missing two great areas of opportunity.
I like to record the following, in addition to trade stats:
(a) Any insights on market structure gained while observing price action flow, and
(b) Any insights gained during regular checks of myself, including my ability to follow my trading process as well as my current physical and psychological state.
The market structure insights keep me focused on price action, instead of allowing my mind to wander away from the process of trading.
And the insights about my physical and psychological state alert me to patterns of thought, feelings, emotions, behavior or actions which are potential indicators of trading problems.
Another great extension of this concept is the use of your trading journal to also understand how your body and mind act when in an optimal state, not just a negative state. Whenever you find yourself with that winning feeling, record everything you observe about that feeling – how your body feels, the types of thoughts, how you feel about yourself and your potential to master this game of trading. By knowing the characteristics for when you’re in the zone, you can review them and use this information to help you more easily regain this state.
Now, if you find yourself currently in a trading slump and haven’t been using a journal, you’re not too late to receive the benefits. There’s no reason why today can’t be the day you change your processes and implement this highly regarded trading tool. The use of a journal, even over a short period of time, may allow you to start identifying patterns to your thoughts and behaviors, providing you with insights that can lead you out of the slump. And at the very least, the use of a journal will give you a greater sense of control over future results, which is essential for minimizing the depth and duration of your slump.
5. Review Your Strategy.
A word of caution – too many traders panic when they find themselves in a drawdown and immediately start altering their plan. New traders in particular will rarely last past three losses in a row, without searching for additional indicators to use as a filter, or alternate indicators to trigger a trade entry or exit. This is absolutely the worst thing to do. If your strategy has proven to be successful in the past, or in back testing, then do not be too quick to abandon it.
Drawdowns are a normal occurrence, for any strategy and all traders.
Having taken an opportunity for a break from the market and relaxing and refreshing our body and mind, we can now objectively consider the need for a review. The key is in determining whether or not any current drawdown is within the realms of normal behavior, in accordance with expectations.
So, review your past testing or trade history. If you find that similar drawdowns have occurred in the past and been overcome, then you’ve possibly got no need to amend your plan.
However, if you find that this occurrence is well beyond anything that you ever anticipated or experienced before, then you have some work to do. Your strategy will need a thorough review. In particular, you need to assess whether the slump and associated drawdown are a result of your own lapse in discipline, or whether your strategy is failing to adapt to current market environments.
If you’re a discretionary trader as I am, you’ll quite often find that what entered you into the slump was trader error – a lapse in discipline which resulted in an outsized loss or string of losses. And from there the problem is compounded by further poor decisions and actions, as a result of the negative influence of any drawdown induced fear and anxiety. The challenge then is identifying your errors, putting plans in place to minimize recurrence (if at all possible), reinforcing correct behavior, and moving forward again better than you were before.
6. Review and Reinforce Correct Behavior.
I highly encourage all traders to keep a Success File. This is a folder or file containing chart printouts and notes showing examples of well executed trades. And it need not just be the winners – be sure to include losing or breakeven trades which were expertly managed in order to minimize risk.
The beauty of this Success File is that you can pull it out at any time to remind yourself that you can play this game successfully. Reviewing and reinforcing the patterns associated with success can quickly assist in overcoming any current lack of confidence.
Another option for reviewing and reinforcing correct trading practice is through the use of a Market Replay feature available on some trading platforms. After recording the trading session, you can review it with hindsight to identify all the setups which meet your trading plan criteria, then replay the price action in these areas over and over again, training yourself to see the opportunity as it appears at the right hand edge of the screen, and practicing the ideal entry and exit in order to minimize risk and maximize opportunity. This is a tremendously valuable tool available to traders. If your platform doesn’t have one, either ask the company to create one, or find a new platform.
7. Start Again with Reduced Risk and With a Focus on the Process of Trading Rather than the Outcome.
Having taken the steps above, at some point we will feel increased confidence and the need to get back into the markets.
It’s important to not rush this stage – take it slow and steady.
I’d encourage live simulation trading initially, until you feel you’re reading the market well and have proven consistency. Yes, it doesn’t have the same level of emotion, but why risk more money in a live environment until you’ve proven you’re in tune with the market.
When ready to go live though, please consider the following additional risk control measures:
(a) Reduce your position size. Until you’ve proven you’re back to your best, a reduction in size is recommended in order to reduce any further downside risk. Only increase size again when consistency and confidence have been proven at the new level. And increase in gradual increments until you’ve reached your normal size.
(b) Limit your trading to the markets, timeframes and setups that have historically provided you with the greatest success.
(c) Aim to focus on the process of trading, rather than the outcome. Set goals for good execution of your trading ideas. Linda Raschke, in her Slump Busting Techniques presentation on INO TV, tells the story of a trader who regained his trading rhythm and form through absorbing himself in the price action. This is a great concept for ensuring your focus is intimately involved in the process of price action analysis, rather than on your equity balance. Just watch price and provide a running commentary, with no expectation of trading. Call the swings and turn points. Call the changes in trend, or bias. In fact just observe and report on any observations as they occur. This will get you in sync with the flow of price. Before you know it, you’ll be identifying setups and high probability trading opportunities and entering and managing the trades with confidence.
(d) Aim to get some wins under your belt. This may appear to contradict point (c), however that’s not really the case. While it’s usually wise to focus on the process rather than the outcome of your trading, at times such as this it’s especially important to also notch up a few winning sessions. Success will build your confidence. And increased confidence will lead to better trading and further success. It builds upon itself, in a process that is essentially the opposite of your descent into the slump. So, while the analysis, trade execution and management involve focus on the process of trading, keep one eye partly focused on the bottom line. Do not let any reasonable session profits turn into an overall loss. And most important – avoid large losses! Your aim is to get a win or two under your belt. Celebrate the wins and look at this success as the foundation from which you will emerge with new strength. Celebrate your successes. Print out charts from trades which were well managed. Record notes about the decisions made in a taking these trades. If you have a replay feature on your platform, replay these trades a number of times, internalizing the patterns of price flow and personal behavior. Success comes from repeating more of what works, not just from preventing what doesn’t work.
The challenge of a slump is that you’ve placed yourself in a state in which you now doubt your ability to achieve your trading goals. Combined with poor results, this mindset can develop into a downward spiral of negativity which can be challenging to overcome.
Slumps will always be a part of your trading life.
Success comes in implementing strategies to recognize the slump early, minimize the damage they provide, and in regaining your confidence and self-belief as quickly as possible.
Success comes from knowing that no matter what the market provides in the future, you can handle it.
Best of luck,