Breaking The Cycle

I’ve been working with a struggling trader, helping him to discover where his difficulties lie. Sometimes when we are in the thick of things, it can be hard for us to see for ourselves what might be obvious to others. Having someone look in from the outside can be a real benefit. In this particular case, the problem was one that is all too common among many who are relatively new to the business of day trading. The trader was stuck in a variation of the destructive cycle of the grail hunt.

The standard grail hunt cycle, as you’ll know if you’ve read the free booklet available from the front page of this website, goes something like this: The student trader learns a trading stratedy, usually from a book, seminar, or a trading coach. The strategy is probably sound in itself, but the new trader underestimates the time and discipline required to make it work consistently. It may be that they start trading it well, or they may hit a loss early on. Either way they will hit a losing period sooner or later. The loss could be due to the student not trading the system correctly (overtrading, hanging on to losses, the list of possibilities is almost endless), or it may be down to market conditions and thus expected within the parameters of the system in question.

However it happens, once the student enters the first period of drawdown they become disheartened and decide that the strategy must be at fault. At this point they go off in search of a new strategy, or something different to trade, or they look for a new “guru”, and in this way as they seek out the holy grail of trading systems, the cycle repeats.

The Destructive Grail

The grail hunt is highly destructive because with each iteration the trader becomes more desperate, and usually a lot poorer until eventually they give up when they run out of motivation, money, or both.

The trader I’ve been working with was stuck in a variation of the regular grail hunt cycle. It went like this: He would start trading a new strategy, and with the enthusiasm that accompanies any new endeavour, would put loads of effort and discipline in to every day of trading. Naturally this usually meant a successful start.

However, once he was comfortably ahead of the game in terms of points, he would start to become complacent and, believing that he had now found the system, would pay less attention to his trades. Of course, this reduced focus and effort and saw him rapidly lose his gains.

The switch from being healthily in profit to suddenly sitting on a loss served as a rude awakening, and he would regain his focus and start trading in a more disciplined manner once more. However, being in negative territory in monetary terms, when the inevitable down days came along he would find them much more difficult to cope with — he had no profit reserves to buffer him. And so this trader would, in true grailhunting style, move off in search of another new system.

Here’s What You Could Have Won

The real kicker is that once he started trading his new strategy, he would begin seeing perfect setups for the old one appear on the charts! All self control and discipline would go out of the window as the trader started mixing signals between the new strategy and the old, with predictable — and costly — consequences.

The remedy for grail-hunting is, of course, to understand that there is no holy grail, that the only way to ensure a consistent outcome is to trade in a consistent way. If a trader can’t follow their system 100% of the time, then either they lack the discipline required for the job, or they don’t have enough confidence in their strategy.

Confidence in the trading strategy system is easily acquired by paper trading it for as long as necessary to understand every nuance of the method being employed. When you experience the odd loss and then see those losses more than made up for by subsequent gains, it becomes much easier to believe in what you’re doing.

Discipline can be more difficult to attain. Whole books have been written on the subject of successful trade execution, including by me.

Are You Afflicted

The trader I’m working with was fortunate in that he recognised he had a problem and sought help before his account ran dry. It was easy enough to diagnose the problem, and I daresay he could have figured it out himself had he trawled through is own trading logs and analyzed what he was actually doing rather than what he was trying to convince himself he was doing. If you’re not making the kind of profit you think your strategy should be generating, don’t wait until it’s too late. Take time out, preferably at the weekend when the markets are closed and you have some space between you and your most recent trades, and look back through your logs. Try and see them as an outsider would see them. Can you honestly defend every entry and exit decision you made in the last week? Your answers might surprise you.