How to Avoid "Deer in the Headlights" Syndrome

psychology is the key to success in trading. are you match tough?

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TheRumpledOne
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How to Avoid "Deer in the Headlights" Syndrome

Postby TheRumpledOne » Sun Jun 10, 2007 3:22 pm

[highlight=yellow]Read the following at least once a day until it sinks in:[/highlight]

How to Avoid Deer in the HeadlightsSyndrome

If this scenario has not happened to you, you haven't been trading enough:

You're excited. You see your set-up or read a great news report on a company and can't wait to execute the trade. You do, buying a bit larger position than you're used to, but this is the sure firetrade they say that will make your year right in front of your eyes. Excitedly, you watch as you start to make money!

Suddenly, without warning, something goes wrong. Why has the stock retraced to my buy point?!you ask. They must be shaking out the weak hands. I have to be strong!you exclaim.

Before long, you're underwater, but that's ok. You didn't bother to place a hard stop yet because, well, this was a great trade. Or maybe you did place a stop and you pulled it out when the market approached, sure that the market would reverse right when theytook your stock away by wicked stop-running tactics.

So now the stock has blown through your original stop and you're still in the trade? losing money as a flood of (in this case) sellers are entering the market and driving the price lower against you.

YOU FREEZE.

You don't know what to do. Your palms are sweating, your heart is racing and your head is pounding. How could this be happening to me [again]?!you exclaim.

You have just experienced Deer in the HeadlightsTrading Syndrome. You're in a situation you never anticipated and you're losing money faster than expected. You know you should exit (or get out of the road or oncoming traffic) but you can't.

I can point to at least three occasions in my personal day-trading where this has happened and they stand out in my memory because they cost me so much money and I felt horrible for days after experiencing such unexpected and deep losses. Events like this force you to the crossroads - either you quit and walk away disgusted or you get back up and learn your lesson and vow never to let that happen again.

How can you prevent this from happening?

This is a little harsh, but really the only way to overcomethis is to have it happen to you personally - and I don't mean superficially. I mean, you have to have an experience where it hurts your account, your pride, everything. But for those of you to whom this has not happened (and you are actively trading? especially day-trading), it will and the best thing to do is be prepared.

First, include this (or a similar) sentence into your trading plan:

'I will honor my stops[/I]and I will only take positions that are within my position sizing limitsor alternately I will not take positions larger than normal(define what this means for you personally.

But IF you violate these rules (that's ok - don't beat yourself up too much yet), then there's one thing left to prevent a catastrophic loss that erodes days or weeks of profits:

When you are psychologically frozen, TAKE ANY ACTION AT ALL to unfreeze yourself.

What do I mean? Place a physical stop. Place a bracket order. Hit the sell nowbutton. DO SOMETHING.


When you take action, you physically release the blockon your brain functioning. It might be the wrong action at the time, but it is an ACTION. Perhaps the stock will reverse but you can't take this chance. Don't lower your stop to the next technical decision node, be it a trendline or a moving average or a Fibonacci projection. Your mind is clearest when you evaluate risk/reward and support/resistance when you don't have a position on. Negative psychological effects are at their lowest when our trading account is clear of positions and we can evaluate a bit clearer.

Technical analysis deals strictly in probabilities, not certainties. You cannot AFFORD to play in probabilities when you are rapidly losing money. It is best to kill the trade immediately, or alternatively, place a hard exit stop just below the current price (market order, that is, not a limit order. When you want out, you want out. Don't play games for a few cents). If the market takes you out, at least the painstops. Odds usually favor the stock continuing its rapid descent rather than reversing. In the rare cases the stock does reverse after your exit, that's fine. It's just probabilities. You cannot AFFORD one trade to continue to go against you and negate weeks of profits. It is NOT an option and you must prevent large losses literally at any cost.

In summary, when you are gripped by fear and frozen by a rapidly losing position, TAKE ANY ACTION in your account - exit immediately or place a market stop-out order slightly away from price but do NOT play games, do not perform sophisticated technical analysis, and do not remain motionless.

When a car hits a deer, not only is the deer damaged,(or killed) but so is the car (and sometimes the people in it).

When the market hits you like a car, the market is never the one injured - you are. Sudden catastrophic losses may destroy something more valuable than your trading capital: Your will to trade and your hopes and dreams in one fell-swoop. Prevent this above all else.

http://blog.afraidtotrade.com/
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!

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User avatar
TheRumpledOne
rank: 10000+ posts
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Joined: Sun May 14, 2006 9:31 pm
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Postby TheRumpledOne » Tue May 25, 2010 12:47 pm

Time for review.
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!



Please do NOT PM me with trading or coding questions, post them in a thread.


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