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.)
- 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.)