Trading Addiction

Bad Assed Trader:  This week I found myself drawn into The Dark Place.  It probably wasn't the first time I had visited but it was the first time I recognised being there.

Everyone knows that gambling can be addictive.  Let's be honest, trading is closely related to gambling in many respects.  We are spreadbetting - the clue is in the name and the fact that we are not taxed on our profit.  Research has shown that when animals are given random rewards (they press a lever and sometimes get food treats, but not always and without any pattern) they become addicted to the action which brings the reward.  They will carry on pressing the lever until they drop in the hope of the reward.  This is different to being trained to do something and always getting a reward when you get it right.  In these circumstances the animal soon stops the activity once the reward no longer appears.

I found this out from "Trading in the Zone" in which Mark Douglas observes that the same is true with gambling - an addiction to random rewards.  He speculates that traders are prone to the same problem as there is so much that is random about the market.

Fortunately I don't have an addictive personality naturally.  I've never been addicted to anything and don't intend to start now. But I think that if I am completely honest on Wednesday I paid a visit to trading addiction.  This is how it happened.

My past week was one of my worst in terms of percentage loss.  Thankfully as I'm only trading on about 20% of my account the actual loss is small but I am disappointed in my performance and have been reflecting on what happened and why ever since.  Most importantly, how can I prevent this happening again?

I knew I was "vulnerable" after having such a good week previously and had felt that as I had concluded April up rather than down on my account I was starting to get the hang of things.  I tried to be guarded and extra vigilant as a result but it seems the ratty part of my brain (see last blog) decided to fight back.

I was trading on bank holiday Monday and could have got off to a good start if I'd just stuck to my usual rules but as it was a bank holiday I had less confidence in my usual "put the stop loss on and a reasonable target and walk away" approach.  I don't have a rule about trading on bank holidays and so I thought I'd trade but watch carefully.

If I had done my usual I'd have made over 3% on the Euro (EUR USD).  It did hit 1% quite quickly but my target was at 3.1% and when price action started chopping 3 hours after entry I was kicking myself for not just setting a 1% "bank holiday special" target and I moved my stop loss up to break even and got stopped out.  It then went up to my target over the next few hours.

By mid afternoon I saw my set up on cable (GBP USD) and took the trade.  Unfortunately I was by now not at all clear about what my bank holiday trading rules were and thought I should revert to my usual rules and just set the target and stop loss and go.  But on reflection this was a heroic move on my part, how often does cable move 48 pips after 3pm on a bank holiday?  Not last week anyway.  If I had set the target at 1% (20 pips) I'd have had it in the bag.  Instead I was 1% down due to cable moving up a bit but not enough and then dropping back down.

I think this then set the tone for the rest of the week.  I had missed the chance to make 4% and instead lost 1%, I'm sure my ratty brain was determined to get me into trades to regain the loss.

I jumped in with unusual haste on Tuesday on both currency pairs on trades that only just met my rules but were a bit early in the morning and lost another 2% and then realised later that my exact set up occurred on the Euro at lunchtime and if I hadn't been at work I could have made 4% on that.

This realisation that I was now 3% down instead of a possible 9% up if I'd played my trades correctly (and not been at work) was not helpful to my psychology.  Ratty brain was kicking in and I was then failing to give due weight to the signs which showed that the Euro and cable were both about to retrace and not tradeable according to my rules.

By Wednesday ratty brain was keen.  I then changed one of my rules ("change" being my self-fooling version of "broke") and decided this would then allow me to trade cable all day - 7 consecutive trades with 7 consecutive losses.  How embarrassing to have to confess to that.  And to add insult to injury the Euro fell into something close to my set up but would have required a rule break to enter so I held back and then watched it shoot up over 100 pips - 60 of which my target setting rules would have allowed me to take: another missed 3%, albeit legitimately.

You'd have thought I'd have called it quits that week but I still ploughed on on Thursday morning with another couple of trades - both stopped out.  So the end result of this week is - Mum please look away now - 11 losing trades on the trot.  Oh dear.

The bizarre thing is that throughout this whole episode I did not feel any pain.  I thought I might be masking it or planning my way out of it (see earlier April blogs with pain in the title) but I looked and there was none.  What I did feel was that I had been drawn into this pit of addiction briefly - during the process of repeatedly taking those 7 trades on Wednesday.  I really must have been, given that with my current strategy and rules I'm only planning to place 2-3 trades a week.

Oh I have been a fool.  You know when you watch a film about a hero/heroine and things always get really bad for them at one point in the film, everything seems lost and you wonder how they will make a comeback?  I like to think I have now reached that low point.

I thought I had before but now I really hope I have.

Reading "Market Wizards" taught me that many traders have to suffer a big loss before they really truly learn why they have to be disciplined.  I feel I have suffered this big loss and am sharing with you, my blog readers, to help me to get to grips with it.  It's so easy to just skirt over these things and keep trading rather than really look into what you are thinking and feeling at the time and being honest about that.

So why no pain?  Because I kept thinking about what I was learning from the experience.  I kept feeling that this was something I had to go through in order to come out the other end and really know why my rules have to be my rules and that I can no longer adapt them to suit the situation of the day.  But if you've been reading my blog for any time you'll no doubt be thinking "Why on Earth is it taking her so long to learn? Why doesn't she just bloody well stick to the rules?".  I have asked myself the same question more than once.

I have reflected on my personality to understand my inclination to behave in this daft manner when I know in theory that discipline and sticking to rules is what it's all about.  I realise that one of my character traits which has enabled me to succeed in faceless bureaucracy is my flexibility and adaptability to the current events.  Working in the NHS means continual change and to survive in change you have to keep adapting, be flexible, spot the opportunities of the moment and exploit them.  I'm ashamed to admit this has become my speciality.

This trait is rooted deeply.  As the third of four siblings I learnt as a child that life was easier adapting to others than expecting to set the direction, you're just not that high up in the pecking order to have a chance of calling the shots.

I discussed these issues with Younger Daughter Now Taking Confessions and our analysis took us to the conclusion that people's characters do seem to fall fairly easily into the four "elements" of earth, air, water and fire and that mine is clearly water.  I go with the flow.  I am flexible, adapt to barriers and respond to other elements.  This is not ideal for trading.

So what with my ratty brain and my watery personality how am I to make a success of trading?  Is there any hope for me?

I believe so.  Once again I have had to unpick more aspects of my personality, see them, name them and take action to reshape them to work for me in this mission.

When I first joined the NHS as a graduate management trainee I went through a gruelling and comprehensive two day assessment centre during which I had to complete numerous challenges under constant scrutiny by senior managers.  At the end I was interviewed by a very senior manager who, I was told later, had summed me up with the words "She has potential.  Needs harnessing."  I have to say I was none too chuffed with this slightly insulting comment after I'd beaten off nearly 200 competitors to get onto the scheme, I thought it made me sound like a horse.

But part of the reason it naffed me off was because I knew there was an element of truth in it.  And I know that only I really have the power to harness me.  The NHS never managed it over the 20 years I've been with it.

I have come to realise that my inclination is to exploit any gaps in my rules if allowed in any way.  I also realise that unless I fully understand and buy into the meaning of rules I find it virtually impossible to follow them, my natural whim is to break them and carve my own river bed.

I have spent today setting out in words of one syllable exactly what my rules are and, more importantly, WHY.  So that there can be no doubt and no room for flexibility.  No more changing the rules.

And I know I must shift into a different mode when I am trading - no longer fluid water, adaptable and flexible.  I cannot change the fact that deep down I am as water but I can find the power of water and use it.  There are times when even water can be still, strong and rigid, stubborn even (just ask my Mum)...

Ice: Bad Assed Trader must become the Ice Queen