Michael Covel

Feedback received today from a client:

“Dear Michael, this is more of a commentary than a question. I just want to express my recent experiences and place a large exclamation point on being ready to accept losses prior to opening a trading account. My experience has been that due to the nature of any trading that cuts losses short and allows winners to run, a great percentage of the initial trades could very well show up as losses and upset a traders psyche…”

“…Without a recognition that a dollar gain trade on [a trend following] system, for example, could take anywhere from 2-6 months to develop versus a dollar loss trade on the same system which could turn for loss as quickly as the first day, and that the first 5-10 trades could become dollar loss trades; without that recognition, a deep psychological adversary could sneak in and upset a sound trading system. You explore this in the coursework, write about it on your blog and give examples of traders that blew up due to straying from their system, I just want to re-iterate how important this topic is and how regulating expectations, and tempering reactions to losses and gains alike is an extremely large piece of trading. So large, I believe, that it needs to be part of my own daily checklist, before I go to bed I get comfortable with waking up and seeing all of my long trades gapped down through my stops and all of my shorts lifted up through the clouds, I go through the reactions when the market is closed, I try to cover some extreme examples so I can set my mind in motion around dealing with these scenarios psychologically. Dealing with them mechanically is not an issue, my stops are in place, I know how much risk is in every trade, that’s the easy part. It’s the 7th loss in a row and a poor nights sleep because of something unrelated, like an illness or death to a family member, or a child up all night nervous about her first day at school, or macro events like the devastation in New Orleans or Iraq, or a car accident, or a renovation to your home, these seemingly unrelated events play a big role in loosening up your psychological defenses and letting in thoughts of failure or thoughts of defining oneself by current trading losses. Then thoughts pile on about changing something in the system, instead of dealing with whatever the actual issue is–sometimes the action that starts the ball rolling is difficult to recognize, so scapegoats are pointed at and a devastating cycle could begin. Bob Prechter, who often seems a bit nutty (re: Elliot Wave predictions), spoke about this when he was trading in a trading contest, how when his wife was pregnant and on bedrest his trading was killing him, then when she finally delivered a healthy child and could get back on her feet how easily the trading seemed and the gains came. Everyday life can be an enormous deterrent to success, separating one’s identity from trading, tempering emotions and using a sound non-discretionary trend following trading system supported by consistent risk and position sizing parameters can go a long way toward being successful in the here and now, after all, the here and now is the only place we will ever be. Thanks again for offering and maintaining the best trading resource in the world, bar none.”