Whether they are working full- or part-time, traders are likely to experience multiple swings in their careers. Just like the markets they trade, they too will experience uptrends and downtrends in personal profits, and even the odd crash or windfall. But, over the long run, it is the trader who stays vigilant - who knows when to trade actively and when to sit on his hands - who stays in the game over the long run.

The phases a trader cycles through have different characteristics. By understanding the qualities of the market, the systems you are trading and how these might affect your personal profits, you can better adjust and hopefully minimize the effect of declining profits or losses. Psychologically, it can also help to know that almost all traders go through similar experiences, both good and bad. (If volatility and emotion are removed, passive, long-term investing comes out on top. Read Buy-And-Hold Investing Vs. Market Timing.)

The Trader Downtrend
This is very likely where most traders begin their careers. They have capital, they usually have some sort of game plan and they begin trading with full expectations of becoming wealthy from the financial markets. But alas, even though there may be a few early wins, capital often starts to deteriorate. The capital may even completely evaporate. Hopefully, many lessons are learned during this time and it can be viewed as a paid education. A trader can pay the market to learn - unfortunately, many fail to realize what the market is showing them. Instead, they get angry that the market is not going where they think it should go, or they berate themselves so much that they become crippled in making proper market analysis. (Trends are what allow traders and investors to capture profits. Find out what's behind them. Read 4 Factors That Shape Market Trends.)

Experienced traders likely went through this early "education" as well. Even as experienced traders, they will face times where losses seem to mount or profits are extremely hard to come by. During these times, it is the experienced trader's, well, experience, that allows him or her to stay alive in the financial markets. Some do fall, however, and their former profits are distributed back to the markets. Understanding why this phenomenon occurs can help new and experienced traders avoid being wiped out, or as in the case of many, being wiped out again.

When profits are dwindling or losses are mounting, here are a few questions to ask:

  • Is my trading plan complete? Does it account for all types of markets (uptrend, downtrend and flat)?
  • Is my trading plan feasible based on current market conditions?

    • Certain strategies will not work in certain market conditions. It is important to realize this and minimize trading until conditions become more favorable. A strategy that uses volatility will likely do poorly in dull markets and a breakout strategy will see more false signals in longer term, ranging markets.
  • Are my position sizes exposing my capital to undue risk?

    • While risk tolerance varies, the higher the risk per trade, the less likely a trader is to last. Risking no more than 1-2% of capital on a given trade is a good rule of thumb.
  • Have I been averaging down?

    • There is no reason to add to a losing position. Risk is likely increasing when we average down, and it is increasing on a position that has not shown us what we expected.
  • Have I been following my trading plan?
    • Everything mentioned above should already be covered in the trading plan. If it is, then all you need to do is follow your plan. Remember why the rules were chosen in the first place, renew your commitment to them and take some time to re-analyze your plan and implement it.

The Trader Uptrend
Hopefully, most trader will get to experience an uptrend in their trading lives; it is the part where profits materialize and increase. In really good times, winning trades seem to come no matter what and the trader feels invincible. These are great times and should be enjoyed while they last. However, while it is easy to get caught up in the emotion of a winning streak, the trader must realize it will end. To maintain your edge, there are a few things to keep in mind and question while this good streak is going. (Take a look at how the market signals impending economic cycles and sector performance during each stage. See Sector Rotation: The Essentials.)

  • Why is my plan working so well right now? Can I adapt it to work better in other market conditions?

    • It is possible the strategies employed meld well with the current financial climate, but is it possible these strategies could be adapted to other market environments to improve performance during those times as well?
  • While good times should be taken advantage of, would an adverse market move wipe out a disproportionate amount of profits?

    • During good times it is easy to take on more risk than is necessary. The feeling of invincibility can become a detriment if, when the streak finally ends, it wipes away all or a large portion of former profits. Keep risk in check, even in the good times.
  • Are stops and trailing stop orders being used?
    • Just because many trades have worked out recently does not mean you should abandon using stops. Always make sure risk is defined before each trade. Trailing stop orders will be beneficial to you if you have large, unrealized profits. By using a trailing stop, you will be able to realize at least some of the unrealized profits should the market turn.

Trade Actively or Sit on Your Hands
Many great traders have said that knowing when not to trade is what separates the winning traders from the losers. During a bull market, anyone can buy stocks and win, but it is the pro who knows when to back off and avoid losing those profits. This takes experience and, as we have learned, even the experienced traders get caught up, make mistakes and go through phases where they experience diminished profits or rising losses.

Thus, as outlined in the questions above, it is important to build a trading plan and trading psychology that uses the good times while not exposing oneself to financial detriment if the market turns, and also only trading when it is prudent to do so. Figuring this out can often be a simple and logical process. As an example, if the market is in an extremely tight range, even a day trader may not enter the market because the profits are too small relative to fees and risk. Therefore, at times it is better to sit on the sidelines and wait for opportunities to arise which allow traders a better chance to make significant profits.

It often appears that traders have many lives; some wipe out multiple accounts before finally getting it, while others experience large swings, never quite reaching the profits they want. Still others lose everything. No matter the case, trading is never a perfectly smooth vocation. By asking yourself pertinent questions and adhering to a well-prepared trading plan, many of the bumps can be avoided. For traders going through tough times, if a solid plan is implemented there is sunshine after the storm. (For more check out our Stock Picking Strategies Tutorial.)

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