The day after getting your butt kicked can be one of the most important trading days of your career. I am not talking about the normal, or slightly above normal, butt kicking. I am talking about one of those days that you just got hammered for whatever reason. Maybe you were stubborn, thinking “the market has to come back.” Maybe you added to a bad position and it just kept going against you. Maybe you said, “I Hope” and she wasn’t around to hear you scream her name. Or maybe, like me, you got caught on the wrong side of a world news event driven market, and the market gapped against you.
For this example I will use 1991, the night of Gulf War One, according to Saddam Hussein – it was going to be the mother of all battles. On the night of January 17, 1991, I went home long 7 contracts of crude oil -7000 barrels (sounds bigger than it was, it’s a small position). News came out that the air war of Operation Desert Storm had started.
I called my uncle, who was trading energy for AIG, and he told me that crude oil was up $8. I couldn’t believe it. I was up $56,000 on the trade. Okay, what does this have to do with getting your butt kicked? Read on …
In 1991, there was no electronic market in the energy’s and the floor traders did not have the ability to sell in the OTC market. Over the next few hours, I kept getting calls from my uncle, who was able to trade the OTC cash market, and he was telling me, “David, we are selling everything we can $7 higher.” Then $6, then $4, then $3. Then I got the call, “David, we are trying to sell everything we can at unchanged.” I was still a young, new trader, but I was smart enough to understand what that meant. I said, “Thank you for your update but please don’t call me again, I’ll talk to you in the morning.”
The next morning I heard that the mother of all battles ended up being the mother of all duds. Iraq’s army didn’t get one plane off the ground, and no missiles were even launched, let alone reached the oil fields. When I got to the trading floor, the market was limit down $7.50, and the market was trading a dollar lower in the cash market.
The crude market had a $16 swing overnight. When the market opened, I was down – down the $56,000 I thought I had been up the previous night. This was a key moment in my career. The first thing that can go through a trader’s mind is “I have to make it back.” WRONG. There is no making it back. It’s gone.
A trader must think of each trade as a new trade, and think of each day as a new day. Looking back will get you nowhere.
After getting your butt kicked, the first thing a good trader needs to do is calm down. Even if it means walking away from the trading desk for a moment. Or, if needed, walking away for a day or two in order to start thinking clearly again. The amount of time needed to recover mentally will depend on the person. There is no set amount of time, whatever it takes is fine.
Then, when the trader comes back, they should cut their volume and start chipping it out to gain back their confidence. As @theenegerytrader and I spoke about, this could take some time. The effects of a really severe butt kicking last longer than the day it happened in. It tends to change your view of the market, and more importantly, your confidence. If you’re thinking of taking a swing at the market, you need to consider that, if you are wrong, it will cost you more than just the day. I have seen it take some traders weeks to get back to the normal form.
The real question is What happens to the traders who do not take the proper steps and time to get back into their normal trading patterns? Those are the traders, both big and small, who end up “getting carried out,” as we used to say on the trading floor.
As I said in Trading Tip #1 – Leave Your Ego at the Door – this is also important after a big loss. If you feel you have something to prove to yourself, your friends or your company – think again. Be careful of being part of statistic that might end your trading career.
After a big loss:
- Do not try to make it back. It’s gone. It’s a new day.
- Walk away and clear your head.
- When you start trading again – cut your size.
- Get some winning trades on your pad.
- Chip it out. Do small trades with some profit. As time passes, you will regain your confidence and work your way back to your normal volume.
- If you get hit again, take a day or two off and do something totally unrelated to trading – do not look at the markets.
- While you are taking some time off – do not second guess yourself. You would not have been correct on every move so don’t listen to your own BS.
- While taking time off, do not worry about missing moves in the market. From the time the markets were first traded, you missed many moves. In the future, there will always be more to catch.
- Always remember never risk the mother lode – always be able to come back.
- When you come back read again from #1.
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