A few weeks backs I wrote about catching yourself before disaster hits. In that entry I discuss what happens when you make a couple of mistakes in a row that lead to complete disaster. Then, a couple of weeks back we got a comment in one of our blog posts that touched on this subject. I would like to expand a bit further on this subject as it is one of the easiest way to rip up big money.
Revenge trading is a byproduct of frustration in a stock. Most likely this excited mental state occurs after you take a couple hits in a stock or you can’t simply get on the right side of any stock. After a few losses you start to rationalize that the next trade is the one that you will be right on. You start being over aggressive in plays in which your risk:reward profile is not as favorable. You tend to add to your position aggressively on any sign of confirmation to your trade. In the end, the risk does not justify the reward as you either get out too early for little profit, scratch the play, or take a massive rip.
I have had a hard past couple of days. I have noticed that some of my favorite setups have not worked as of late. I found myself forcing some moderate trades with bid daddy size out of frustration (recently, I hit 21k shares in WFC on a trade that I would normally have hit 3-5k shares). I have not ripped up big but only because I have been able to catch myself when I start to get overly frustrated.
I am able to catch myself because I have spent time thinking about what frustrates me. I have done my visualizations to help me keep my composure on those instances. But when that is not enough, I force myself to go on a walk. Sometimes a 5-10 minute break away from trading really helps me clear my mind. Specially in this snowy mess we have going on in the city. In the end, it is not what you do to help you gain your mental state. What is important is that you stop trading, gather your thoughts and get ready to make ONE good trade, and then one good trade. I know that this will be my game plan tomorrow. What will yours be?