This article is based on the work of Ari Kiev from the August 1995 Technical Analysis of Stocks & Commodities article, Stopping points in trading.

Here is how Ari defines a stopping point:

The stopping point is the whole sequence of events, reactions, interpretations and automatic decision making that characterizes your approach to life and trading that may keep you from being fully engaged in trading opportunities.

I think of it as a switch that forces you from trading rationally into trading unsuccessfully. It is what happens when you venture out of your comfort zone, not by choice, but by a trade going against you. Recognizing when you have crossed into the twilight zone can save you big bucks if you stop trading and fix what is bothering you.

For example, there are probably times when you have said, I am over trading, but continue to trade, or I should put a stop on this trade and then don't.

Quiz Time

Here is a quiz to help you determine if you have entered a twilight trading zone.

  1. Are you afraid to trade because you fear taking a loss?
  2. Do you find it risky to trade with all of your capital?
  3. Do you prefer others to enter a stock ahead of you, showing the way to success?
  4. Do you mistrust your instincts?
  5. Are you reluctant to trade a stock because you fear being labeled a follower (when others have already bought the stock)?
  6. Does trading anxiety prompt you to cut your profits short?
  7. Do you have difficulty following your own trading rules?
  8. Do you avoid or are reluctant to buy more of a stock moving up?
  9. Do you avoid re-buying a stock in which you lost money?
  10. Are you unable or reluctant to switch from long to short (or vice versa) when the trend reverses?

Answering yes to any of the questions means you are really screwed up.

If you fear taking a loss then get over it. The fear of losing forces you to interpret market action in a way that colors your trading ability. It is like moving from a brightly lit room into a darkened one. At first, you can't see a thing but over time, objects come into focus. Recognize that every trade you make is a new opportunity to profit.

The fear of losing can come in many flavors, including a reluctance to trade with all of your capital, buying many small positions of low volatility stocks, and allowing others to blaze the path for you. Others are reluctant to following another trader. They want to be a leader, not a follower, so they may stop trading altogether. They may avoid trading stocks that have already moved up. Even if they have a winner, they do not want to add to their winning position.

A trader that mistrusts their own instincts can manifest this in several ways, too. They have difficulty following their own rules. They cannot cut losses short and let profits run. Even if they have a winning trading strategy, they cannot follow it. Switching from long to short or trading the same stock in which they just lost money becomes difficult or even impossible. They may not be able to follow the market trend because they fear that as soon as they do, the trend will end.

Solutions

If you have any of the symptoms described above then recognizing the problem is most of the battle. Once you find yourself becoming defensive, fearful of taking a loss, or answering yes to the quiz questions, then refocus on your trading rules. If necessary, stop trading and use the downtime to refresh your trading style. Review your trades. Become comfortable with the notion that not every trade will be successful. You are running a business and losses are just the cost of doing business.

Do not be afraid of change. The markets move from bull to bear. Prices sway from high to low volatility and back again. Maybe your trading style prefers one and not the other? Explore the reasons for your losing trades and write down why they failed.

For those that work with a trading partner (or others in a chat room, for example), create rules that allow you to trade your own position as you see fit without worrying about offending others.

Ask yourself if you are trading up to your full potential. Are you willing to make changes to your trading style to accommodate the evolving marketplace? Are emotions coloring your ability to follow a trading plan? Did you trade successfully following rules, but are now wracked with fear and anxiety?

Get back to the basics. Take a break from trading and go do something else (garden, go for a walk, ride a bike, have sex). Put aside your self doubt and refresh the rules that once made you successful. Cast aside old beliefs and bad habits.

The next trade you make is going to be a big winner.

-- Thomas Bulkowski