Out of Rhythm

 | Aug 24, 2011 | 9:26 AM EDT  | Comments
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IWM

It doesn't take much to throw us off. A fight with the wife. A sick kid. Bad traffic on the way to the office. Your favorite sports team losing. A crazy market. There are so many things that can throw us out of rhythm when trading and investing. And you need rhythm. When we are out of rhythm, so much can go wrong. We become frustrated, angered, depressed or just plain frozen. Trades can become forced and losses can mount quickly. Trades made out of frustration can violate all our rules from size to stops to entries. Losses mount and the frustration grows and a lack of rhythm foretells a trader's "tilt."

Or we sit and do nothing, watching opportunity on top of opportunity pass us by. Normally, I am all for sitting out a day, and when you are out of rhythm it is a logical first step. But what happens when one day becomes two. Two days becomes four. Four days become eight. I'm out of fingers to continue, so I'll stop there, but the point is, it can develop into stage fright, or "trade fright."

There are so many little things that can derail. Sometimes they are big things, but anything can quickly turn into a butterfly effect. I know these overnight moves in the futures and opening morning gaps are wreaking havoc for many. It is important to develop coping mechanisms when we get out of rhythm. Everyone has one or two that works better for them. Early August was particularly rough for me, so getting back into rhythm was important.

I generally do two things to get back into rhythm. First, I greatly narrow my focus when trading. For instance, even though I kept an eye on the overall market yesterday, my biggest focus was on the iShares Russell 2000 (IWM). I had up a weekly chart, a daily chart, a 15-minute chart that spanned five days and even a 1-minute chart. Chatting with some other traders like Bob Byrne and Tim Melvin, I was calling out patterns as I saw them, targets, expectations, then writing it down to hold myself even more accountable. Bob was on the Nasdaq futures, and with everything running together, it was a nice comparison. The three of us expanded our chatter to include gold a bit later in the morning, then turned to banks, where Mr. Melvin echoed some of my feelings on the charts there later in the day. A few correct calls, though, and feedback on the wrong ones, went a long way to restoring confidence.

The overview of yesterday also demonstrates a second path toward recovering your rhythm: talking. Talking with other traders is one of the best things to do. However, I prefer live chatter the most. Whether it be on something like Skype or on the phone or some messaging system, getting instantaneous feedback can help break "trade fright." Sometimes you just need a confirmation that someone else is seeing something similar or the same as you. It doesn't guarantee the trade will make a profit, but it may eliminate some doubts in your mind about your ability to spot an opportunity.

Some other, smaller changes may help as well. If you normally don't listen to music, then maybe mute CNBC for a bit and turn on some tunes. Like to laugh? Get some humor into the day. You'll most likely trade best when you feel at ease. It you are constantly jumping around on the Web, then step back. Say no to your email inbox for an hour or let the latest football news go until the end of the day. (The second one is a bit harder for all the fantasy football folks out there once free agency starts in your league, but most of you probably have a pass right now.) If you sit at your desk all day, then take a 5-minute walk every hour or just get up and stretch.

Rhythm is often about routine, but when your rhythm breaks, then maybe it is time to break the routine ... at least for a bit.

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