Tuesday, March 27, 2012

Trading on tilt and prevention

If a person is hit once, he may try to hit back; if he is hit twice quickly before he can react, he may try to run away and if he is hit three times before he can react, he may go berserk and try to kill or be killed. To some degree this is a survival mechanism and applies to most human interactions. Repeated harassment of someone is also likely to cause the suicide mode to kick in and I have discussed how Poker players can go on tilt if they are in a bad beat.

Losing a trade causes similar reactions to losing a poker hand. This is because a moderately good trader expects his trade to work and is often shocked when successive trades are lost one after another. The more trades you lose in succession, the more you are likely to throw caution to the winds and enter on poor setups trying to make back the money you have lost. Narrow days such as today are extremely dangerous to any style of trading, be it scalping, swinging, with-trend or counter-trend.

You may not even realize you are a trader that can go on tilt, but its very obvious from your trading history. If most of your days have a small steady profit on a few trades but a few days have huge losses with a large number of trades, you are susceptible to tilt. All kinds of bad trading habits that you thought were kicked for good will re-surface when you are on tilt and you will lose trade after trade and you may end up blowing your account on a single day.

There are a few simple things you can do to minimize the damage when going on tilt. A very important technique to prevent a string of losses is to avoid trading for at least two more swings right after a loss. For example, after my loss of b8 buy at b12, I need to sit out until b17. With a few exceptions, taking the very next signal is inadvisable unless the failure move went some points beyond your signal bar.

The first thing you do when you lose a trade is to ask yourself if you made a mistake (poor signal, incorrect read, etc). If so, note it down right away in a journal. The very act of noting down a mistake disengages your mind from the chart and forces you to acknowledge your mistake. The next thing you do is to step back from your computer, perhaps get a glass of water to drink or do a couple of push-ups. This is analogous to walking away after being hit instead of risking life and limb in a fight. This also calms the urgency you may feel to get in right away and helps you to avoid trading for two swings. If you encounter a second loss right away after returning, you are less likely to go on tilt.

After two or three losses, halt your trading for the day. Traders who go on tilt usually do the least damage if they are able to stop early. The more they trade trying to make up the loss, the larger their daily loss. Its a rare trader who has gone on tilt and recovered in time to make up the loss and end the day a big winner. You will never be able to halt after two losses unless you are also able to step back after a loss and perform the rituals above.

Often, the reason for your string of losses is something you may be unaware of. Perhaps you didn't get sufficient sleep or are hungry or had too much to drink the prior night or your internet connection is sporadic or you are trading the wrong contract. In any case, if your win/loss pattern is very different, you should halt trading for the day.

A fixed maximum daily loss is the perfect complement to a fixed per-trade loss. Celebrate your freedom from the trading desk when you hit it and go out and enjoy your day.


  1. Great post cad, if only I could control this more and eliminate kryptonite days, I'd be able to concentrate more on trading and not self-management!

  2. What else do you think is wrong with a trader, if he did set up a fixed amount max loss (in addition to my per trade loss) & still went on a tilt?

    1. Guess the "my" was a Freudian slip :)

    2. Every single trader has gone through tilt. Sometimes it lasts for days. The important things are to realize tilt exists, happens to everyone and try to be aware as its happening. I suggest looking at your order list. If you are overtrading and its loss after loss, you are probably on tilt. The best thing you can do at that point is to stop and do something to take your mind off trading. Ideally, walk away from your trading desk. The knowledge that you can lose everything you earned in the past few months can be lost on a tilt day should convince you to hit the brakes. Some days, your game is just off. Go do something else.