Charted Terror-tory: Fending Off the Late-Night Demons

Break your goals into bite-size chunks and they won't seem so scary at 3 a.m.
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My demons come out at night. At about 2 a.m. or 3 a.m. I wake up in a fit, scared out of my mind that I have no idea what I'm doing with my trading. It doesn't happen often, mind you. But when it does, I can lie awake for hours, panicked that I've fallen into some hopeless abyss, with my fate for the entire rest of the year to lose every dollar of equity I have.

Now I'm absolutely sure this state has something to do with chemical imbalances in the body. Or perhaps it's due to fatigue or exhaustion. Whatever the cause, it's the overwhelming feeling of total despair that can make a man think crazy things.

I know many of you have been there. In fact, for almost anyone who has traded anything more than a modest amount of money, facing the demons is a rite of passage. In fact, if you have

not

faced them, you're either stupid or unrealistically fearless.

You see, I hate the demons. I toss and turn and worry that everything I'm doing -- and yes, espouse -- is just total BS. Hell, maybe I have no idea what I'm talking about. Well, that's no big deal; I've been wrong before.

But folks are counting on me. Yes, I have other sources of income, but none with the impact of my trading gains. And even if I don't need the cash flow now, I might someday.

So, yeah, it's important I not lose "it." You know, my touch, my "vision" or whatever I've been able to do thus far to get me here.

Yet fear the demons as I do, they're actually helpful because they make me constantly re-examine everything I know, think and do about trading. Do the demons visit you? Not often, I hope, but if they do, here are some suggestions on dealing with them.

One of the hardest things to do is actually get out of your warm bed, especially at 3 in the morning, and tackle whatever's bothering you. Unfortunately, it's the only surefire solution I've found.

So, at 3 in the morning, there I am, turning lights on in my office, brewing a pot of coffee and booting up my PC.

It's then that I always realize the value of keeping both copious notes and a detailed spreadsheet.

Therefore, the first thing I tackle is current trades I have going. Did I do any in haste? Any outside my method? Any I wouldn't have taken again? Thankfully, the answer is usually no. But if I've ventured where I shouldn't, I resolve to close those trades first thing the next morning.

That generally takes care of any short-term problems. The bigger issue, of course, is whether the strategy I'm currently implementing will get me to my goals for year-end.

Hmm, goals? How many of you have specific trading goals for a discrete time period? I do, and I've found it is the single most important part of my trading plan for keeping me sane.

You see, if you're doing your job right, you should be able to get within a few dollars of how much you net each year, quarter, month and even day. And that's where extensive record-keeping comes into play.

Yes, I wake up scared stiff that I won't make my yearly nut, and it's normally because of a few bad trades that happened recently.

But then I look at my spreadsheet and see that, yes, my profit per day is on par; my estimated profit at the end of the month is on target; and if I just keep executing, I will make my nut by year-end. Ah, all is right with the world!

Or maybe my spreadsheet isn't so kind. Maybe the demons are right. Maybe I have been overly optimistic, and I will come nowhere close to what I hope to achieve.

Therefore, the next step is to think hard about my goals. Is a 100% return unrealistic? Is netting $10,000 a day a wild stretch? How about $10,000 a month? Is that a lot if my equity is only $50,000? Or maybe not, if my equity is $3 million?

Once I define or redefine my overall goals in a realistic manner, it's helpful to break them down into bite-size chunks. As an example, a 50% return in a year sounds awfully high for a trader. But that's 3.5% per month if you're willing to reinvest profits. There, that sounds a lot more doable.

And when I start breaking down my goals into manageable chunks, the demons tend to fade away. Wow, I can't do 50% a year. But, wait, I should be able to do 3.5% a month if I don't get stupid.

And perhaps it's this last area that causes the demons to come out in the first place: the feeling that trading is just so overwhelming, so hard to grasp at times, that it's just inconceivable that you'll ever get a handle on it.

But, you know, it's one step at a time. Diana looks at a 50-meter-long course pool and can't possibly imagine swimming a 100 breast in 90 seconds. But break that down into splits of 43 out and 47 back. Extremely fast? Yes, especially for a 10-year-old. But her best in the 50 is 41.89, so it's entirely doable if she swims it one lap at a time. The problem is that at her age, she hasn't learned to break goals into discrete, edible nuggets, and therefore hard-to-reach goals look impossible to achieve.

But maybe it's a problem at any age. Our 50% a year is 3.5% a month, but that's less than 0.2% a day. Healthy, but manageable. But without that breakout, well, 50% still sounds awfully high.

So little steps never sound as difficult as big steps, and when I'm done with all this, when I realize that I just need to execute correctly just for the next day and not worry about all the other days, I'm usually back on track.

And then the demons can go on and haunt other traders. They won't bother me anytime soon. And when they come back -- and they always come back -- I'll have a pot of coffee waiting for them.

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at

gbsmith@ibm.net.