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Stepping out of the Circle This is a very interesting inner tendency. Why? - you ask. Because, those who suffer from this inner tendency in a big way often use the self-same black and white thinking to justify a faulty conclusion and sometimes they are using this inner tendency as a unwitting cry for help. Lenz (not his real name) had been making good money for over 2 years with his trend-following system day-trading the Nasdaq 100. If not every month, at least every quarter, Lenz had been profitable, but he was now concerned he had lost his touch and the last 6 months were all big losing months. When asked what had changed in his trading or other aspects of his life since he last had a profitable quarter, it took Lenz several occasions to mention in passing that the change in profitability coincided with having given up trading using stops. When polled, Lenz suggested that now his profits were about the same on average, but his losses were much bigger. As Lenz saw no connection with his larger losses and his abandonment of stops I asked him how he felt about stops. He said, in his words, that either: • "when I used tight stops I hardly got any winning trades", • "when I used loose stops my losses were too big". You will have noticed that his answer was not about his feelings but about his results. When I asked how tight was tight and how loose was loose, the answers were a 0.25 of a point and 5 points. When I asked what other stop sizes he had tried - he was confused - from his point of view two extremes in a large range were all there was to test. So another tack was taken and Lenz was asked what profit to loss ratio (in money not number of trades) he had experienced when he was using stops. 3 to 1 when using 0.25 point stops and 3.5 to 1 when using 5 point stops he advised. When I suggested these were quite good ratios, and a lot better than making losses, his response was classic: "But I have tried everything with stops and nothing works!" When asked again how he felt about stops he found the emotional space to admit to himself that being stopped out was like being punched hard in the stomach and he had tried to avoid being stopped out for that reason. It took some time for him to accept that there might be a middle ground, a grey between the black and white and that his losses could be contained if he found a stop level between the two extremes that felt less painful to him. The story has a happy ending - he now trades the S&P 500 to Nasdaq 100 spread with very large stops that occur infrequently and so cause him some pain but rarely occur, and he is again making profits regularly every month. He accepts he needs to learn to see the stop losses differently if only for his health, or find a way to trade profitably without stops, but is "happy with this middle ground" - a major success for Lenz. Lessons Learnt Many of us suffer to one degree or another from black and white thinking. It can be a symptom of avoiding deeply felt pain. Now we are aware that we are not always able to see our way out the circle of using such thinking, slowly our general awareness will sometimes help us break free of this self-defeating circle of thinking. |