Deer in the Headlights
Why do consistently profitable traders blow up their accounts in one fell swoop?
There are actually many reasons, but in every case, it is because they do not effectively mentally rehearse what could go wrong when they are feeling unresourceful so that they will automatically make the right choices.
Falling off a Cliff
Cliff built his account over a period of two years from fifty thousand to over two hundred thousand. He knew that his strategy worked and felt that he had his money management under control. His risk parameters were in alignment with both his account size and what was appropriate for his strategy. Cliff became comfortable with the every day job of being a consistently profitable trader who always adhered to his mental stops.
One day Cliff saw an opportunity that looked especially promising so he risked more than what he would under normal circumstances. He did account for such opportunities in his business plan. All of a sudden there was an unexpected sell-off and Cliff was suddenly in a state of panic with the drop.
He could not stand the thought of losing over a month’s worth of income, so he broke his rules and doubled down three times depending on the one inevitable pullback. It did not come!
Cliff was initially paralyzed to do anything. He thought about the disappointment of his wife who finally believed in him as a trader. Then he remembered that call he overheard where his wife was prideful as she told her mother that she finally would be able to give up the job that she hated. Cliff recalled the family meeting just the weekend before where they discussed going to Europe for the first time in the summer. Paralysis led to anger as he broke his own cardinal rules and watched his whole account disappear.
Preparing for what could go wrong
Risky professions require that you prepare for everything that could go wrong. In fact, many risky businesses spend most of their training for what could go wrong and how to react to it.
When a pilot has clear weather and his aircraft is fully functional, it is easy for him to smoothly get people to their destination. Pilots spend most of their training time on what to do if something goes wrong. If he did not, there would be many more plane crashes.
A surgeon who has a textbook case of a surgery is most likely going to find a happy patient after an operation. But most doctors know that when you get into the body there is no telling what you might find. So doctors prepare for every scenario, so that when they are faced with a series of the unexpected they know how to react.
A trial attorney would love to have a judge and jury accept the premise of what makes his client innocent. Of course, the lawyer on the other side wants the same outcome for his side of the case. If an attorney does not plan for every scenario, he might find that an innocent man gets convicted because of his negligence.
We can look at many professions that involve risk and come up with the same conclusion. Planning for everything that can go wrong will keep you on the positive side of performance.
Trader preparation for what could go wrong in the markets
While there are many traders who prepare for the contingencies of what could go wrong in a trade, very few prepare enough so that when those situations come up they will automatically, without hesitation, do the right thing. If we take Cliff’s situation, he did prepare in the beginning, but what did him in was that he became complacent assuming that his initial preparation was enough.
A trader must always be prepared for everything that could go wrong in a trade. He must mentally rehearse seeing himself acting appropriately repeatedly. If he does not, he increases his risk to be a deer in the headlights when the unexpected presents him with a risky situation.
Adrienne Toghraie coaches traders and investors to their next level of success by helping them overcome their self-imposed limitations. She has been a keynote speaker since 1989, author of 13 books, and owner of TradingOnTarget.com.
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