Self awareness in trading

After graduating from college in 2003 there was little indecision about what I wanted to do next, move to Chicago and become a trader. Even before that though I was getting an education on the psychological and emotional side of the trading business. In junior high I lost all of my money investing in a small gold stock, in high school my parents had to help me cover a soybean margin call, and in college I rode the tech bubble up and then back down. I will note on the last point that I did manage to buy a Volkswagen Jetta before I lost that money! Each of these would be fun stories for another post but for today they illustrate some of the emotional battles I had even before my professional career started.

Once I landed in Chicago I had the good fortune of being around other successful traders which paired perfectly with my persistent desire to soak up everything I could. The owner of the trading firm served as a great mentor to me especially in navigating the gut wrenching emotional swings that came along the way. One of his lessons was to make things more “micro” and less “macro” when you’re struggling with your trading. Preservation of your momentum should be at the top of your list. Your currency as a trader is momentum and confidence. Keeping that means taking a planned loss as well as getting out at your target. Once you start to do those things you get rolling on a trading streak. Like many things in life the saying “when it rains it pours” seems to fit well with trading streaks. Below I want to pass on some of the lessons I learned from experience as well as from my mentors about trading streaks.

What does a good trading streak feel like?

  • Most of your trades are winners, even the accidental ones
  • Your losers are small
  • You accidentally fall into large winners even though you didn’t try for them
  • You are happy trading smaller
  • You are willing to vary your size based on conviction and market conditions
  • When you face a setback you are willing to patiently wait or make it back with less size
  • When the market is slow you are fine to do nothing

How do you maintain this streak?

  • Willingness to take losers when things don’t feel right even before price goes against you
  • Trade small enough that money doesn’t play into your decision making process
  • Ruthless focus on execution of entry price
  • You’re fine to lose money if you do the right things: take planned losses, proper sizing of trades, and waiting for your setups
  • Doing nothing is a victory
  • Anyone can predict direction but the real skill is isolating proper risk vs. reward, that’s your focus

How does the streak end?

  • You think you’re good enough to trade every price
  • You are trading much larger
  • You don’t need to take a quick loser because you want to double up and add to your loser
  • Your larger size is causing you to be less nimble
  • After an initial setback you go harder at the market to try and make it back
  • You have additional setbacks and you begin to lose your confidence and question if you were just lucky or not
  • You bottom out emotionally, cut your size, and either quit or start over the right way

Even though I intellectually understood a lot of these lessons, it wasn’t until I lived through them (again and again) that they really sunk in. Still even today after 15 years of trading I fall into these same traps. Trading has a way of exposing your weaknesses until you decide to confront them. That can be a great tool for personal growth and is one of the reasons I chose this profession.

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