Anatomy of a Trading Blow-up

Jan 10, 2010 

Blow-ups can bring a quick end to a trading career or slow it down. The good side of a blow-up is, if survived; it can be the best learning experience and prove to establish the most valuable rules in our trading strategy. We tend to learn some of the most amazing things when we are the most challenged. It becomes very clear that our mind and lack consciousness during a blow-up puts us in a place we where we are not in control. 

Additionally, when a trader realizes just how important managing emotions can be and the reality is it’s 90% of the game, things begin to fall into place and turn around. Mind control is essential to each and every trader, at any level. 

So, maybe if we know more about the process of a blow-up, how it begins and what the warning signs are, before they happen, we can avoid them or at least minimize the impact. Facing the villain head-on can cure or avoid a bad situation when trading.  Remember awareness is the first part of changing anything and identifying the conditions before the blow-up happens in time allows us to take hold of our mind and intervene. 

Blow-ups are a combination of personal, market and trading conditions, that stimulate the subconscious thinking creating an environment that is fertile for the mind to morph into, what I call “traders trace”. This is when we become zombies take bad trades, one after another and then the killer, increased size with the uncontrollable urge to get it all back quickly. 

So why do we do this? Please know I include myself in the “WE” as I have experienced this 3 times over 17 years. Also, I am happy to say each time I experience a blow-up it takes less of my cash each time and each time I find myself more in control, so I must be getting the lesson. 

It’s important to be aware that blow-ups can also come on the heals of several great trades or trading days in a row and don’t only happen after a losing trading pattern. Increasing size and letting greed take over also can have the same disastrous results and end up in a blow-up. 

Lets take a look at the conditions before the blow-up after a losing pattern. Some of the warning signs can be and are not limited to, the pattern of adding money to a trading account over and over. Here the losing pattern is taking over and there is a lack of rules in place to avoid the repetition of a bad habit. This is the easy part to fix the mechanics, but the importance here is to figure out what needs to be changed.  Looking at the details of the trade, setting new rules and a defining a new approach is the solution to this part. 

The other part of the blow-up and the catalyst for impending doom is the way the mind is thinking and processing. The mind seems to go into the same process and shifts from the, in control conscious thinking, into the out of control sub-conscious thinking, before a blow-up. 

First the trader is conscious about what they’re doing. They may even know what they’re doing is “wrong” but they can’t seem to stop. The subconscious mind is in control and takeovers when this happens. Next the repeated bad behavior and trading pattern starts, over and over losing more and more.  Than the danger zone happens, brain freeze, traders trance and the mind goes into the “I don’t care zone”. Some have called this “the deer in the headlights”. 

Here is where the big losses can occur. It gets really dangerous when a trader begins to take trades they have no business being in or staying in a trade that’s not working way too long and worst case increasing size on a losing position. It’s almost like the trader wants to fail. They get mesmerized and not in their conscious mind.  

When the sub-conscious takes over it is really coming from emotions and fears and the body is on, autopilot. Emotions while trading that shift the conscious mind to the sub-conscious mind are fear based and can come from thoughts like:

• I’m afraid I’ll miss out – causes the trades to take bad trades or enter too soon, and feelings of anxiousness
• I have to get the money back – causing over trading
• I can get it back faster – causes a trader to increase size
• I’ll take just one more – after a losing pattern,  when they should stop
• I’m afraid to lose more money – so the trader will stay in the trade too long.
• It can’t go any lower – staying in a short too long

 Noticing the conditions that are happening and changing immediately can help to avoid a blow-up. Try asking these questions:

• How many losing trades have I taken?
  • Are they the same?
  • How do I change the approach?
• Am I in control of my losses?
• Do I have stop-loss set correctly and efficiently?
• Do you feel mentally in control?
• Do I need a break?
• What do I need to do to gain my control again?
• What’s most important to me in my trading?

 Additional lessons and warning signs and fixes:

1)     If you are adding money to a trading account over and over something has to change and a strong look at you approach is important. The first time be sure you have new rules in place to avoid repetition.

2)     Change your trading in some way and analyze the reason for all losses

3)     Take a look at your stop loss rules and parameters and fine-tune

4)     If your conscious mind is not in control, emotions and your sub-conscious are, so work to do what you can to get back in control

5)     If you go into traders trace take a break ASAP also drink water

6)     Get help if you need to

 Finally KNOW you are NOT the only one who has gone through a blow-up and if you have never experience one know we ALL run the risk. Even the most successful traders have their “war stories” of their blow-ups. Though not proud of them they will tell you the one main thing they learned and how the mind is so critical to be in control. They will also tell you what they did different to avoid another blow-up from happening. 

Till next time good trading!   No……GREAT trading!