Overcoming Trading Setbacks

We’ve all had trading setbacks and challenges…large and small.  From a string of losses, huge drawdowns, complete account blowouts, you name it.

The key though is how you view setbacks.  The Stoic way is to control what you can control and not lose any sleep over what is outside of your control.  Another Stoic principle is how you react to challenges, roadblocks…the unexpected.

I want to share with you one of the most amazing stories of overcoming challenges, adapting and moving forward that I have come across.  We can overcome any trading setback and challenge if we can all remember this story and apply even just small fraction of what this man can teach us.

Overcoming the odds: A profile

Growing up in Japan during the worldwide Great Depression, in a family that was far from rich, he left grade school at the age of 15 and moved to Tokyo to get a job as an apprentice in factory.  He loved the smell of gasoline and oil and anything to do with anything with wheels, cars and motorcycles.  He got along well with his boss, who saw his passion and aptitude and encouraged him to experiment with parts lying around the shop and build a race car.

He built and sculpted it by hand and was such an engineering success it won the Japanese championship in 1924.1

His real dream though, was to start his own business and had a great idea about designing and selling piston rings to Toyota.  He designed the rings, working long hours, took them Toyota, confident they would buy it and he would land a huge contract to be their supplier.

They rejected it.

He figured he had more to learn, so he went to engineering school, where his teachers and classmates made fun of him and his designs…a foolish waste of time, they told him. 2

It was humiliating, especially since had pawned off and sold his wife’s jewelry to build his piston rings.

He kept at it though, took back his re-designed rings to Toyota two years later and landed the contract!  He needed to build a factory though to fulfil the contract, but Japan was gearing up for war and concrete was in short supply, with the government restricting it’s use.

He didn’t give up and actually worked out a new way to manufacture concrete and his factory in the process!  3 He became a major supplier, with his factory right nearby Toyota’s.

World War II had started though, and bombs rained down on Japan, industries and factories were targeted…Toyota’s.  His shop was obliterated and he lost everything.

He was undeterred and kept pushing forward, realizing he could take the under the wing gas tanks jetisoned by American bombers to rebuild his factory…and he was back in business.

Only to have it levelled yet again.  He was out of business and unemployed.

After the war ended, gasoline was in short supply.  He came upon the idea to attach a motor to a standard bicycle, since it was an easy way to get around without burning a lot of gas like a car.  He had designed the motor himself…it was quieter and better than any other.

Family and friends wanted more, faster than he could build them.  The demand was there, but he had no money.  So he wrote to 18,000 bicycle shops in Japan, asking for startup money and about 3,000 responded and lent him the money to get started.

Was it an success?  Nope.  Nobody seemed to want it. Here again, he was undeterred, using it as a learning experience and adapting, changing what he needed to become successful.  He learned that it was too big and bulky.  Customers wanted a cheaper, more streamlined design.  So he went back to the drawing board and the modified bike that he called “The Cub” became a huge success!

Soichiro Honda with the 1963 Honda RA270F prototype Formula one car

It is now the 1970’s gas supply shortages gripped the world.  Big gas guzzling cars were not selling well.  Seeing an opportunity, he designed small, lightweight, fuel sipping cars and the rest is history.

Soichiro Honda and his Honda Motor Corp was well on it’s way to becoming what we know today…one of the worlds largest and best car and motorcycle manufacturers in the world.

One could say he was extremely unlucky.  So much happened outside of his control.

A true Stoic in his actions though, he kept working his way around obstacles and setbacks, controlling what he could control…his own actions.

I’ve had my setbacks as a trader and I’m sure you have as well.  Not to diminish any of our problems in trading, but if Soichiro Honda can overcome obstacle after obstacle and continue forward…I know that we can do the same with our trading.

Trading Mindsets: Fixed or Growth?

Psychologist Brett Steenbarger, who specializes in trading psychology (and is also a trader) divides traders into 3 groups when it comes to dealing with setbacks and losses. 4

  • The first group would become angry and frustrated as their losses mounted.  They forged ahead, but let their frustration get the better of them, increasing their risk, making trades they should not be taking.
  • The second group would stop their trading, stepping away from their desks, perhaps taking the day off.  Take the time off to cool down and not allow their frustration at the market force them into making unwise trading decisions.  They would only trade when they had a calm, rational mindset.
  • The third group would also stop their trading but study… but during the time off from trading they would study and analyze their past trading decisions, searching for ways to improve their craft.

How did these 3 groups perform? 

  • He found that the first group performs the worst, prone to increasing their risks, drawing down their trading accounts and were more likely to blowout.
  • The second group did much better than the first, since they were focused on preserving their capital and trading when their rational mindset returned.  This group was average though, since they didn’t adapt and learn from their mistakes.
  • The third group did the best.  Not only did they preserve their capital by stopping their trading when suffering setbacks (they still experienced the frustration like the first two), but they took the time to learn and adapt…to become better traders.  They have a positive response to their setbacks, using the obstacles as a way to improve their trading.

These are the traders that he believes have a “growth mindset”, popularized by Carol Dweck. 5  The growth mindset is one which believes setbacks will happen, when they do, the obstacles can be used to learn, adapt and get better…to improve.  The opposite of this is the “fixed mindset”, which believes that one’s abilities are innate, unchanging.  These people are embarrassed and dread “failures” because they believe it will expose their shortcomings, which they cannot change.

Carol best describes it as:

In a fixed mindset students believe their basic abilities, their intelligence, their talents, are just fixed traits. They have a certain amount and that’s that, and then their goal becomes to look smart all the time and never look dumb. In a growth mindset students understand that their talents and abilities can be developed through effort, good teaching and persistence. They don’t necessarily think everyone’s the same or anyone can be Einstein, but they believe everyone can get smarter if they work at it. 6

Do you see echos of the growth mindset all throughout the story of Mr. Honda? 

  • He worked to improve his piston rings…going back to school.
  • He found resourceful ways to build a car with scrap metal.
  • He invented a new way to create cement in order to build his factory.
  • After WWII, he looked around and found opportunity in gas and income limited incomes to create a cheap, motorized bike.
  • He saw the opportunity in the oil shortages of the 1970’s to achieve his dream of becoming a big car manufacturer by selling small cars.

I would be willing to bet that on a day-to-day basis, he worked to improve even the smallest of “mistakes” and failures across every aspect of his business.

What can we do about trading setbacks?

Keep a trading journal

How do you know where you are going if you don’t know where you have been?  This is one of my top recommendations that can help you out of a rut, to overcoming setbacks, to spotting aspects of your trading that you might not have noticed when you are in the thick of trading.

In my trading journal/trade tracker, I include the trade entry price, my sell stop, the percentage of my overall account I have risked, my expected exit point if the trade were to work out perfectly, along with a link to saved snapshot of the chart.

I also include my thoughts before I enter the trade…and my thoughts after the trade is complete.

Here is why the journal tracker is so important…when you are in a rut, and have suffered setbacks, such as a string of losses, you can spend the time to study those trades to see if you can figure out where things got off-track.

I have found that some of my bigger drawdowns are when I have had a string of successful trades, when as much as I try to reel my emotions in, some over-confidence has crept in.  While I thought I was remaining calm and rational, I have found that I had become “sloppy” in some areas.  Specifically, taking trades with a lower risk/reward ratio, as well as trading charts that did not have the most ideal setups I typically look for.

Keeping a trading journal makes it easier to have a growth mindset, since it allows you to look back at the cold-hard truth of your previous trades and make adjustments to become a better trader in the future.

Make adjustments to your trading methods

As the expression goes…”if it ain’t broke, don’t fix it.”  But what if it is broken?  You have to be careful here, because you don’t want to jump willy-nilly from one thing to the next.  That is a recipe for losing your mind and your trading stack.

However, if after careful, rational analysis (looking through your trading journal), you determine that something needs to change…don’t be afraid to make changes!  Make sure they make sense, are in keeping with your overall strategy, your personality, you understand exactly how these changes might affect your trading results, etc.

After all, the market does change and it has been well-documented that trading strategies go in and out of favor.  When you make your changes, I recommend to not throw out the baby with the bath water, but see if making small, incremental changes can produce huge variations in your trading results.

Make sure to backtest and then trade cautiously until you are back on track.

Keep your perspective

Don’t lose sight of your long term goals.  When you experience setbacks, make sure you act like Honda…control what you can control, which is your next steps.  Do it in a rational way.  If you need some time to collect your thoughts, to calm down, to take a step back…do it.

If you get a flat tire, would you slash the other 3 in frustration?  If you had gone on a diet and lost 20 pounds, would you give up and throw it all away if you had a slice of cake in a moment of weakness?

Keep your eyes on your long term goals.  Take pride in your next steps, what you you can control.

Study your past trades and learn from them

Everyone loves to look at the successful trades, the ones that worked out.  Like a shiny object, they hold them up and admire!  The losses?  They get swept under the rug.  They are the monsters under the bed…nobody wants to look there.

That is exactly where we need to look.  Find out whether YOU were responsible for the losing trade.  First of all, losing trades are part of this business.  Inevitable.  If you followed your rules, used logic in analyzing whether a potential trade met your parameters and made sense, but the trade didn’t work out…FINE!

But if you know that you didn’t do all that you could have done when you looked at a losing trade, then you have some work to do.  This is where keeping the journal will help.  You can see the reasons you entered the trade, how the chart looked, etc.  Also, deep down inside, you might know you were trying to “force” things, hoping things would work out.  Perhaps greed got the best of you.  Admit that.  It’s ok!  We are human after all.

But resolve to yourself that you will work to watch for the same issues on your trades going forward.

Learn from your mistakes, don’t sweep them under the rug!

-Glenn

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