Frustrations in Trading 12/22/13

I am an Engineer by background and part of a senior management team for my company. The tools I was taught were math, physics, chemistry, and all those engineering courses that only reinforced black from white, a correct answer versus a wrong answer. We did not get positive grades for almost correct answers (although we had teachers that did credit our work sometimes). We learned to be careful and correct. Well in trading that becomes a lot harder to figure out.

In trading, I get frustrated with a trade that turns South on me after I enter. The more risk I take, the greater the loss when it occurs. And it tends to occur right away, making me think twice about taking a risk again. Then another entry signal pops up. I either miss it or avoid taking it. And sure enough that signal works out great and the stock climbs up beautifully without me on board. I look at all the $$$ I coulda shoulda and woulda made. Frustration mounts…

Or listening to my co-worker tell me that he had been trading this XYZ stock for ever and he wished he had bought it when it was $1.50 a share (It used to be $70). But when the markets turned down, he had no extra money to put in. He was stinging from the losses and did not have the nerves or capital to buy more. Another example of Frustration in trading. Missed opportunities.

When the markets turned down in 2008, the VIX (Volatility index or Fear factor) spiked from the teens to climbing up above 50. There was Lehman Brothers going bankrupt at the time while Cramer said Buy – Buy – Buy the week before… There was plenty of blood on Wall Street and Main Street. I remember telling co-workers that the guy who jumps in now into the market is going to make a killing (I had been spared the downturn thanks to technical analysis). I had cash sitting in my accounts; but did I jump in and buy stocks then? No. I thought I could limit my risk and buy put options on 5 financial stocks, as I had no way of knowing which one would suffer the most.. But I did not do it. Missed opportunities. Frustration… knowing what to do when; but not being able to do it because of fear and risk. How many of us can overcome that level of fear and take the trades? Very few… I vow to do that next time…

Another frustration can occur from not getting out of a bad trade when the signal came and went... I have very few of those, although I do make an occasional mistake or miss a signal.
I had posted a chart on Ford end of November urging caution and scaling back. It looks like that was well timed as the stock has broken down since then. See below. If a person saw this post and did not react, then he/she will be facing the frustration of missed signals. If I missed the signal I would get out now and not get frozen.

I do know a friend who is fearless. He likes to jump in when there is blood everywhere. A true contrarian trader. He has done well… sometimes being the slow and steady trend following trader is frustrating, particularly if you miss a trade that really makes a killing. The crazy thing about trend following systems is that a few good trades make the bulk of the returns. Rest of the trades are slow deaths. The only way to succeed then with such a strategy is follow the charts and stocks you want to trade, and take all the signals. With trading there is always losses and pain. But if you can climb to the level where you follow the system through the pain and losses, then over time you will have a steadier equity curve than those that are doing investing without any tools other than hope and prayer. Even contrarian traders can see stocks go from bad to worse and get in the way of a falling knife. 

Trading is a frustrating business, filled with many stabs of losses. There are always other stocks and other markets showing better returns than I am making. I have to be happy with my equity curve pointed up year over year and avoiding the huge losses that would make me give up this business altogether and put my money in a bank account earning 0.2% interest… I will strive to build better systems that mesh with my personality in trading. Managing frustration in trading is very difficult and there is no way around it; but to confront it, deal with the pain and find a way to move on recognizing there are always going to be losses along the way..