Most, if not all, of us have probably been there. You’re in a position, and it’s not going well. You try to “improve your entry” by adding to it, but it just goes further against you. You continue to fight the market all while there’s a little (much too quiet) voice in your head shouting “Get flat you idiot! Live to trade another day!!” You ignore it of course. Your balance is getting dangerously close to the minimum margin required, when something flips in your head.
You let whatever will happen, happen… and BOOM goes the account.
Within TRG, we call this the “Fuck It Switch”, and we’re all very familiar with it in a variety of ways. For some of us we’ve had this happen in cash accounts. For some it’s in evaluation/combine accounts. For some it even happens in sim! But we’ve all experienced it. That moment where somehow all good sense and risk management just leaves the building, and you throw up your hands and just don’t care anymore about what happens.
Obviously, this is not healthy for our long term survival in the markets! So what do we do about it?
Unfortunately this comes down mostly to self awareness and discipline. Ideally, we would learn to recognize when this is rearing its head, and simply exit the position immediately, taking whatever the loss is, and walking away to reset our mental state. But this is a lot harder than it sounds. Confirmation Bias kicks in, and we start to see only the moves that are in our favor, totally ignoring the overwhelming evidence that we’re on the wrong side of this.
For most people, probably the simplest way to prevent this from happening, is to set a “circuit breaker” that stops you completely at a certain loss limit. In many platforms this is built in (you can do it in Sierra Chart), and you can also do it in Rithmic R-Trader Pro. But, there’s a catch… if you can set it, then you can override it! And often times that’s just what happens. The circuit breaker kicks in and stops you out, but you’re still convinced you can “make it back”, and so you remove it and keep trading.
This is why real prop firms have someone whose job is literally titled “Risk Manager.” Their whole purpose is to monitor the traders’ results and if anyone is too far out of line, shut them down and tell them to go home for the day. They literally can’t trade any more, as they are locked out of their account(s) completely.
I would suggest that if someone has a problem with not adhering to their circuit breaker, or of overriding it so they can keep trading, then they need to give that control over to someone else. If you use Rithmic, have someone you trust change the password, and only they can log in and do anything there. Only they can lift the circuit breaker if you’re able to convince them to do so, but hopefully they understand why it’s there and that it is designed to protect you, from you. But really you should do whatever it takes to develop the discipline to not need outside interference like this.
At a minimum, at least have a circuit breaker in place if you don’t have the self control to stop at your pre-determined daily loss limit. If you can’t do this, then it’s a near certainty your trading career will be short lived (or very expensive!)
Until next time, good trading!
Jonathan van Clute
Community Manager, Trading Research Group