
Trading like this can be fatal for you, Part 1
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I was 24 years old and it was July 2007.
I was sitting on the fixed income trading floor of BNP Paribas at the time and was just itching to take a big short on the stock market.
Equities had been rallying in the face of a crashing fixed income market.
It was like smiling into the fist of a much younger Mike Tyson.

I finally pulled the trigger after months of waiting and shorted as much high beta stocks my margin would allow.
After all, that’s how the legendary Jesse Livermore used to do it right?
I doubled my money in a matter of weeks and was on an emotional high. I truly believed I had found my calling in life.

:::cut:::

High off the initial win, I routinely maxed out my account by shorting S&P e-mini futures contracts.
I had one thesis and that was the stock market was going to crash due to the subprime crises brewing underneath the exuberant indices.
I could feel it in my bones – this was my short of a lifetime!

Fast forward 6 months, gone were my profits from my “big short” and gone also was my initial capital.
Easy come easy go, but the emotional pain persisted for much longer.

I’ll never forget the feeling of waking up to a $25K loss even before the market opened.
I closed my short in disgust by 9:45am…only to see the market close negative for the day.
The catalyst was the introduction of the TARP program to ease the strain on the financial sector which had no real impact for months.
But staring at such a big loss had totally incapacitated me mentally and even physically to react in the proper manner.

Yes, I had caught the top in the market and Yes, I doubled my money at first, but I lost everything.
The emotional suffering was made infinitely worse because just after I gave up,
the markets really started crashing, where -500pt days became routine.

I found out the hard way just how physically, psychologically, and economically taxing trading the wrong way can be.

A trader who fails to keep his emotions in check often make common mistakes that trap them in a vicious cycle:

* Revenge trading
* Not respecting stop loss levels
* Forcing trades, especially when losing money
* Chasing trades for fear of missing out

The psychology of trading is so fundamental to a long and healthy trading career. I wish I had read this article when I was 24.
If you are having issues keeping your emotions in check, do yourself a favor
and read [part 2](trading-like-this-can-be-a-fatal-for-you-part-2.md) of this article. Closely.


Trading like this can be fatal for you, Part 2
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In the first part of this article, I briefly discussed a rather painful early trading experience during the financial crises in 2007/2008.
I was short and still [somehow killed my account](trading-like-this-can-be-a-fatal-for-you-part-1.md).

I let my emotions dominate my trades earlier in my career.
My self-worth was tied to each dollar made or lost.
I was many things back then.
Too eager, too risk-loving, too young.

Eventually, learned that my trading career is like a war that never ends.
Every minute of trading is a battle with others trying to separate me from my money.
If we fail to manage our emotions, we become easy targets.
After blowing up my account multiple times, I learned some very painful lessons.

As promised, I will share with you my framework to keep psychologically sane while trading and also what to do when off balance.

:::cut:::

PREVENTION

The key is to prevent yourself from being off center psychologically.
Once you let emotions take over, it is time to stop trading.
There are a few guidelines I have developed over the years that I follow day in and day out.
It has helped tremendously.

Prevention is also my number one goal because once you self-destruct, it will take much longer to gain back what you lost.
Below, the orange line shows the corresponding gain you need to offset a particular loss (in blue).

![](hpHfx5I.png){.thumb}

**Here are my processes for prevention. I look at these every day before and after trading to make sure I’m inline.**

1. Set realistic goals – my goals have nothing to do with percentage returns or amount of money to make.
   They should fully be within my control.
   **It is crucial to develop a trading strategy that fits with your personality which makes it easier to abide by your trading plan when things get tough.**
   Know where to enter, exit and think about how you will react under various probable scenarios are before making any trade.
2. **Absolutely do not trade first then plan later while staring your fluctuating account balance. As long as I follow my guidelines, I have achieved my goals.**
3. Space out your day – I set hourly alarms to remind myself that for certain times of the day,
   I should be taking different types and amounts of risk.
   For instance, from 11:30am-3pm EST, I am rarely trading and if I am, my risk is minimal.
   I generally risk about 1-2% of capital on trades during heavier trading times and only 0.25%-0.5% during the lunch hours.
   **Having an alarm go off every hour also helps me to refocus and follow my trading guidelines.**
4. **Take a break if performance is subpar** – I stop trading for 1 hour after 3 losing trades in a row
   and stop trading for the day anytime I lose 5% of my capital.
   I stop trading for 2 days if I have 3 days in a row of losing trades.
   If performance continues to be poor, I decrease risk limits to 0.5% per trade.
   Additionally, I also skip 1 day of trading if I am up more than 10% of my capital in 1 day
   because I tend to take stupid risks following big wins.
   **Remember, you don’t get paid for the number of trades you take and you don’t always have to trade. Rather, it is extremely important to have no positions on most of the time so you have a better chance of staying objective.**
5. Monitor yourself – **Always take notes on each trade so you can improve faster.**
   How did you feel before and after making the trade?
   Were you nervous, regretful, angry, excited?
   You will be surprised to see familiar patterns forming over time and you will know how you should feel
   when you are in the right or wrong trades.
   For me, I don’t trade or dabble in tiny positions when I am sick or feeling unwell.
   Why go into battle when you are not 100%?

*But what to do if already in a massive loss or if already your emotions have clouded your judgement? Here are some things to consider:*

1. STOP – **Take a break right away if you are feeling off center or are trading recklessly. Close your trades and take a 10-minute walk/break.**
   You’ll thank yourself later.
   After all, there are 250 trading days every year and 10’s of thousands of trades to go.
   **Don’t try to hold on and make all your money back today or try to hit a home run the very next trade.**
2. Reassess – Have a think about why you lost money.
   Did you follow your trading plan?
   Can you do something to improve your strategy?
   If the market is too volatile or acting strangely, I sit out and watch the market for a few days just to get my feel back.
   **I get very excited when I can learn from my losses and improve my strategy for future trades. No strategy works forever so you must routinely step back, study your recent trades and try to make adjustments.**
3. Trade smaller – **After a string of losses, I force myself to trade much smaller, risking only up to 0.5% each time.**
   It’s better to add to the positions later when they are profitable and during a consolidation period.   
4. Call on other experienced traders or friends to talk about your situation and hopefully they can provide valuable perspectives.
   There are many coaching services which can keep help to keep your psychology in line.

Finally, taking a break doesn’t mean giving up.
Every time I have taken a break and reviewed my mistakes, I have come back stronger.
Through self-improvement over tens of thousands of trades, you will gain confidence in your strategy and in yourself.
By using this as a guide, I hope you also will find your unique path to skillful and calmer trading.

Blog #revenge-trading

Trading like this can be fatal for you, Part 1

Trading like this can be fatal for you, Part 2

Last thing