(Investing) The Most Important Question to Ask When You’re in a Slump

Slumps happen. The trader who has a respectable 60% win rate has a 2.5% chance of losing four times in a row simply as a matter of chance. That doesn't sound like high odds, until you realize that, over the course of regular trading, such strings of losers are virtually guaranteed to happen. When traders encounter one of these losing streaks, they often interpret the outcome as a "slump". They may even become fearful of the slump--having seen other traders go through harrowing drawdowns or firings--and develop performance anxiety. This only adds to trading woes, making the "slump" a self-fulfilling prophecy.

The question traders naturally ask when they're in the "slump" mentality is: What am I doing wrong? Of course, they have good intentions. They want to identify their problem so that they can effect a possible solution.

But sometimes that question is the problem. The trader is so caught in a problem mindset that he or she loses sight of strengths and what brought success to that point.

For that reason, the most important questions to ask when you're in a slump are: What are you really good at? What are your distinctive strengths as a trader? What has brought you success to this point?

Too often, traders after a hot streak will stop working on their game. Conversely, after a losing streak, they become mired in problem thinking. It's far better to focus on improvements you want to make when you're making money and get back to basics--your distinctive strengths--when you're down. That way, you always avoid overconfidence and underconfidence that can result from mere chance runs of winners and losers.

Here are a few questions that I find helpful in focusing on strengths:
* What markets do you trade most successfully?
* What time frames (holding periods) are most successful for you?
* What times of day represent your greatest trading strengths?
* What are your most successful trade setups?
* Do you tend to trade better from the long or short side?
* What position sizes and stops work best for you?
* How do you prepare for trading when you're at your best?
* How do you handle losses when you're trading well?

The idea is to handle drawdowns by building on what you do best. It also means that it's important to keep tabs on your results and identify your trading niche. If you're not sure of your niche--that area of trading that best maximizes your talents, skills, interests, and opportunities--this chapter from my book might be of help.

It's difficult to stay modest and hardworking when things are going well, but it's just as hard to stay solution-focused when problems abound. If, however, you ask problem questions when you're mired in problems, you may just be compounding your difficulties. Slumps are only permanent if you lose sight of the best within you.

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Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.