The Anatomy of a trading cycle breakdown

The level of success in one's trading, just as stock prices themselves, can and should be charted. Better yet, it should also be analyzed with cross-correlating factors surrounding key "breakouts", "breakdowns", and lulls in performance.

Recently, my discretionary trading was going extremely well. However, I suddenly broke down and violated many of my trading principles over the past few days. Holding onto losers has crushed the gains I made over the past two months, which isn't exactly the most encouraging thing.

How did that happen?

Stage 1: Analysis of the breakdown

Charting my performance and cross-correlating it to surrounding personal events, personal mood, etc. finally gave me a key window into the anatomy of a trading cycle breakdown. For the first time, I saw myself from a distance and broke down the events/characteristics that led to this.

The first thing was to determine the pre-breakdown mentality and trading style I embodied. It involved a willingness to incrementally increase my account size when key opportunities arose, with very little "need for action." This led to increased patience in waiting for the right setups, subsequently reaping the rewards through almost predictable profits.

I then started sensing a bit of "trade exhaustion," even calling it that in my mind at the time. I was also fairly unclear about the ongoing market direction, with few events inspiring anticipation of price swings. I clearly recalled thinking, "it's time for a break," but the apparent need to trade kept me active.

Then it happened.

An unrelated financial event (a vacation package mis-booking which lead to its cancellation) got me rattled, and seemingly set me off down a path of revenge trading. If I made enough money trading, I could get an updated package (which could cost significantly more). Instead of treating trading as a separate endeavor, I saw trading as an opportunity to make up for my other loss.

Stage 2: Psychological re-evaluation and action plan

This type of reactive state of mind, where signals outside of the market can pollute one's thinking and trading, may lead to this type of a breakdown in discipline. A better approach is to treat trading holistically, so appreciating one's overall state of being (whether it be financial or physical health, life events, etc.) should be elevated to trading "signals" rather than treating them as independent of trading.

In retrospect, not being clear about the markets in the context of my discretionary signals was a key sign that it was time for a pause. Allowing personal matters to manifest themselves in trading was a recipe for disaster.


Stage 3: Go do it

Finally, now that I've realized my flaws, it's time to return to my previous style/mode of trading. Maintaining trading consistency is not just something that will naturally occur, but something that has to be proactively managed on the part of every trader to read both market and personal signs that things may not go well in the near-term.