Trading is a serious and a funny business. On the one hand it requires a tremendous amount of patience, subject knowledge, skills and experience. On the other hand it also requires a good amount of luck although many will say this for the luck part. Similarly there are legions of past, current and wannabe traders who believe that trading is purely a game of chance akin to gambling. The truth is in between these two extremes.
Trading is serious business because to succeed in it one has to have a robust and detailed plan, great work-ethics and discipline, and reliable processes and resources. It is a funny business because even after one does every thing right, many times, unforeseen happens that changes imminent profits to losses and vice-versa. Events with very small likelihood of happening – like the Brexit vote of 2016 or the removal of euro-peg by Swiss National Bank 2015 or Lehman Brother’ bankruptcy filing in 2008 – occur and upset the well-laid plans of many. These events are equally capable of turning potential profits into realized losses (snatching defeat from the jaws of victory) or turning potential losses into realized profits (snatching victory from the jaws of defeat).
These two aspects of trading become quite relevant when a trader goes through a streak of losing trades, which occurs to almost all traders now and then. When a trader gets into a rut and encounters a series of losses then usually he or she (henceforth this post will use the pronoun he for the trader even though it refers to traders of all genders) faces a problem that alcoholics face.
Dr. Alexander Elder covered this in his seminal book, The Complete Trading For A Living. Dr. Elder once attended a meeting of Alcoholics Anonymous (AA) and was amazed that if he substituted the word “loss” for “alcohol” then it seemed to him that the meeting participants were talking about his trading. Dr. Elder, who is a psychiatrist, delves into it in more detail in his book but let’s take a quick look at the similarity between alcoholics and traders and how this commonality between the two could be used advantageously to your benefits.
Alcohol intoxicate and makes one feel high and euphoric. Alcoholics get addicted to that feeling but social-drinkers do not. Trades, by generating profit or loss, give emotional high. Some traders get addicted to that feeling like alcoholics and some don’t like social-drinkers.
Alcoholics suffer from a condition where they have a physical need to consume alcohol, even though it has a negative impact on their life. They may remain sober for few days but then the urge to drink pulls them to the bottle. A trader in a losing streak thinks of recouping the losses and feels the urge to trade even though his trading is resulting in losses. In some perverse way he is attracted to losses like an alcoholic is attracted to booze.
A social drinker stops after few drinks before he losses control over self and gets too drunk but the alcoholic continues to drink till he gets drunk. A responsible trader stops trading after few losses or after reliable setups stops are hit. An irresponsible trader continues to trade even after a series of losses until his accounts is severely reduced.
The first stage of alcoholics and traders is denial. They do not think that they have a drinking problem. They blame the negative consequences of their drinking to other factors. As Dr. Elder gives some of the examples that alcoholics give:
My boss fired me ’cause I was hung over and came in late;
My wife took the kids and left ’cause she had no sense to begin with;
My landlord is trying to kick me out of the apartment ’cause I’m a little behind on my rent;
I’m gonna have to cut down on my drinking, and everything will be right;
The trader also blames other factors on his losses. He blames his losses on the whims of the market or the geo-political events or the news or some other reason.
During this stage many alcoholics say that they need to cut down on their drinking and try to make few changes – like drinking different types of alcohols or at different times or in different socializing events – but they continue to drink. The trader also tries to fix the problem but by changing tactics or by deploying a new system or by changing the market that he trade but he nevertheless continues to trade.
Both are in denial. The alcoholic denies that he has lost control over drinking and the trader denies that he has lost control over his trading
Sooner of later an alcoholic hits the rock bottom, which could be a life-threatening illness or rejection by loved-ones or financial ruin or shame or some other big problem, and the pain becomes intolerable. Only when an alcoholic realizes how deeply he has sunk and acknowledges that he has a drinking problem can he start on a recovery program that could restore his life.
Similarly a trader addicted to trading, after a series of losing streaks, hits the rock bottom, which is financial ruin or severe hardship. A trader can turn around his life, like an alcoholic, only after acknowledging that he is addicted to trading and has a problem. Only after such an acceptance can a trader start a program that could restore his trading account.
An alcoholic can recover from alcoholism only when her realizes that he has a drinking problem. This usually occurs when he hits the rock bottom, which could be a life-threatening illness or rejection by loved-ones or financial ruin or shame or some other big problem. Only when an alcoholic realizes how deeply he has sunk and acknowledges that he has a drinking problem can he start on a recovery program that could restore his life.
The rock bottom for a trader is financial ruin or hardship. For a trader to reverse the losing streak he first has to accept that he has a trading problem. Only after such an acceptance can a trader start a program that could restore his trading account. Dr. Elder says that when a trader realizes that the main problem is not with the methods but with thinking can he change and become a successful trader.
The 12-Steps of Alcoholics Anonymous is a very popular and successful program for recovering alcoholics. It is a combination of:
- Acceptance – we were powerless over alcohols
- Spirituality – a belief in higher power that could restore our sanity
- Introspection – made a searching and fearless moral inventory of our selves
- Humility – admitting the exact nature of our wrongs
- Repentance – made direct amends wherever possible
- Continual assessment – continue to take personal inventory and admit when we are wrong
- Serenity – through prayer and meditation improve conscious contact with the higher power
- Coaching – we tried to carry this message to alcoholics
The market is akin to alcohol and putting on a trade is like taking a drink. A successful trade gives a feeling that I similar to the feeling that first few drinks give a person. When losses start to accumulate then it is similar to a person getting drunk.
Traders who habitually go through losing streaks need to follow a program that is like 12-Step program.
|Acceptance||Accept that they do not have control over the market and the outcome of any trade|
|Spirituality||Have a belief in a well-tested and rigorous trading system|
|Introspection||Know the emotional weaknesses, that lead to indiscipline, with respect to greed, fear and the rush of adrenalin that trading brings|
|Humility||Admit that past drawdowns and irresponsible trading (deviations from trading system) have caused financial and emotional damage to themselves and others|
|Repentance||Take immediate corrective action when the trading system is violated or when a drawdown occurs or trading-discipline is not maintained|
|Continual Assessment||Be vigilant about bad trading habits and continually update the trading system to keep it as relevant to market conditions as possible|
|Serenity||Use techniques and methods to stay mentally and emotionally calm while trading|
|Coaching||Share the knowledge and wisdom gained in the market with others as it improves the understanding and mastery of trading process|