Economies have continual ups and downs, and traders ride the corresponding market waves along with everyone else. Some times are more profitable than others based on how the market is acting and reacting to the sentiment of the times, but regulation and technology also play a role. A downturn in trading profitability may not be tied to a particular strategy or to the trader's discipline, but it could be linked to how the trader is able to participate in the market place, and whether their particular methods and ways of thinking will survive in an evolving trading world. Rough patches will likely occur in all traders' careers; how someone handles the main obstacles that may occur will very likely determine if they continue as a trader or not.

(Tutorial: Stock Picking Strategies.)

Common Obstacles

  • Starting Out
    When one begins trading, it can be rough. Often, the first year in trading is enough to deter a trader from continuing on the journey. Uncertainty and lack of confidence is common.
  • Major Shifts in the Market Dynamic
    Traders who trade through several market cycles may experience rough patches as they are forced to transition between different market types – volatile, sedate, up trends, down trends, ranging etc.
  • Regulatory Changes
    Changes in how the market is allowed to operate can affect traders greatly, nullifying certain strategies or increasing trading costs (cost reductions are rarely a problem for traders).
  • Technological Changes
    Technology continues to advance, and along with it so does trading. The transition from trading floor to computer and broker to direct access creates many contingency problems for some traders while providing opportunity for others.

Coming to Terms with the Obstacle
Ultimately, a trader must decide if an obstacle is worth overcoming. He must not fight the reality of the situation, but instead accept it and work with it, or cease to trade. Not accepting a change in the market will very likely result in a further deterioration in performance.

Take for instance the decimalization of U.S. stocks in 2001. This resulted in smaller spreads and changed the landscape of how certain traders traded the market. For some, it may have increased their profitability, but at the time certain traders such as scalpers may have seen a significant decline in profits as making the spread made them one cent as opposed to one-eighth of a dollar. A trader either accepted and adapted, or was forced out of the market.

Changes such as these, as well as new regulations and technological changes need to be addressed candidly by the trader. Each trader must admit this is the way it is and then ask: "Given this, how will I adjust my strategies going forward, and is it worth changing?" In a hypothetical scenario that a tax was placed on short-term trades, some short-term traders may be forced into an alternative style of trading. Such a transition may not be desired by the trader as they like to trade because of their trading style.

A trader may also realize that they only wish to trade in certain market types. If they make money in trending markets, but lose money in ranging markets, they have two options: learn to trade a ranging market or trade only when there is a strong visible trend. (To learn more, see Trading Trend Or Range?)

Thus, if traders accept the obstacle, they can logically work out new strategies if they wish to move forward. If they decide it is not feasible to move forward, they can save themselves from throwing good money after bad. Not accepting a change in the market will very likely result in deteriorating performance.

Overcoming the Obstacle
Once traders have accepted and decided it is feasible to move forward, they must overcome the rough patch. Sometimes, this will only be a matter of time, but there are ways to speed up the process.

  • Starting Out
    When one begins trading, there are many things to learn. Frustration at this point is part of the process. It is at this point that a trader can minimize frustration and hopefully losses by building a thorough trading plan for how trades will be entered, managed and exited. By trading with a structured plan, the trader can then see what areas of the trading plan need work and they can begin to improve them.
  • Shifting Markets
    Markets are continually in transition from uptrend to downtrend to ranging and any combination thereof. The best way to transition from market to market is to accept that changes occur, and not get tied to believing that a certain trend or certain range will last forever. A trader must adapt. Set out guidelines for when a ranging strategy will be used, and when trending strategies will be used. Also, lay out at what points those transitions occur.

Whether regulatory changes or technological changes, the trader must accept that change is a reality. From adversity often comes opportunity, and what at first appears to be a negative may in fact be a positive. The trader must look at ways in which such changes are creating opportunities. By addressing how the changes would have affected their own psychology and thus their trading practices, they can assume that others will be influenced in the same way. This can create a profitable opportunity as some participants will continue to fight against the changes, losing money, which can become a profit for the trader who adapts.

No matter what the reason for a rough patch in trading, traders need to accept the reality of the current market dynamic and situation, not fight against it. Failing to adapt or trying to impose a way of trading that is not suited to the current market often results in rough patches. Declining profits (or increasing losses) do occur at times as traders transition between strategies or adapt to circumstances, yet these times can be minimized by accepting the situation, building a plan for transitioning and by looking for opportunities in occurrences that are likely to have sweeping affects on many traders. (For more tips, check out 6 Asset Allocation Strategies That Work.)

Related Articles
  1. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  2. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  3. Investing Basics

    5 Things to "Deliberately" Do to Improve Your Trading

    Most traders are putting in trading hours, but not improving. Here are deliberate steps that can take your trading to the next level.
  4. Trading Systems & Software

    Use Price Action Trading Strategy for Results

    Bored by the fixed rules of technical and fundamental analysis? Price action trading allows you to customize your own trading strategy.
  5. Investing Basics

    Deadly Habits Of Destructive Traders

    Many traders develop destructive habits that, left unchecked, trigger washout and failure.
  6. Trading Systems & Software

    How to Code Your Own Algo Trading Robot

    Ever wanted to become an algorithmic trader with the ability to code your own trading robot?
  7. Active Trading

    The Right Way To Set Up Your Trading Screens

    Well-organized trading screens sum up intraday market action, breaking it into digestible bites that can speed up complex decision making.
  8. Charts & Patterns

    Avoid The Perfection Trap In Trading

    Avoid the perfection trap and make peace with the market’s high levels of systematic noise.
  9. Trading Strategies

    What Is The Crystal Ball Indicator for Traders?

    If you want to be a succesful trader in the market, here we show you the indicators that will help you achieve it long term. Do you have what it takes?
  10. Active Trading Fundamentals

    Five Biggest Obstacles Facing First-Year Traders

    Address these five obstacles and you'll make significant progress as a first-year trader.
  1. Head-Fake Trade

    A trade where a stock or market appears to be making a move in ...
  2. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  3. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  4. Outcome Bias

    A decision based on the outcome of previous events without regard ...
  5. Active Trading

    The buying and selling of securities with the intention of holding ...
  6. Hindsight Bias

    A psychological phenomenon in which past events seem to be more ...
  1. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
  2. Is it better practice to use a stop order or a limit order?

    Both stop orders and limit orders have their advantages and disadvantages; traders need to decide between the two based on ... Read Full Answer >>
  3. What is the difference between a buy limit and a sell stop order?

    A buy limit order is a specific type of buy order used to enter a market, while a sell-stop order is a sell order that can ... Read Full Answer >>
  4. How do day traders capture profits from the difference between bid and ask prices?

    Day traders capture profits from the difference between bid and ask prices by scalping stock. Sensing that a stock is going ... Read Full Answer >>
  5. What is the difference between a short squeeze and a long squeeze?

    A short squeeze and a long squeeze are situations that can force traders and investors out of their positions. A short squeeze ... Read Full Answer >>
  6. Why does the efficient market hypothesis state that technical analysis is bunk?

    The efficient market hypothesis (EMH) suggests that markets are informationally efficient. This means that historical prices ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!