Sometimes You Need a Mental Breather

Dom typically swung for the fences on most of his trades. He had a great deal of confidence in his strategies and the decisions that he made. He was happier last week when he was up $50,000 and he looked more rested and had a very obvious smile on his face. He recounted that earlier that day, he stayed focused on his trading discipline and strategies that had worked just one week before.

However, on this day, he was wrong on almost every trade. He felt like he could not stop the bleeding. An awful morning of trading was made even more unbearable by an even worse afternoon. On this day, Dom did not take out time for lunch because he felt obsessed with making a comeback.

His situation made me think of a recent Monday Night Football game between the Dallas Cowboys and the Buffalo Bills. The Cowboys should have been blown out after turning over the ball six times, but managed to rally and win with a game-ending field goal. Most interesting to me was how Cowboys quarterback Tony Romo handled the game. By halftime, Romo -- one of the top quarterbacks in the league this year -- had been intercepted four times by the Bills.

This apparently was a huge wake-up call. At halftime, he probably talked to coaches, he looked at films and he rested his body and mind. Most professional athletes need some time to stop and rest in order to perform at their optimal level and figure out what has been wrong with their game plan.

When Romo came out for the second half, he seemed more poised and confident in his ability. Despite making two more mistakes during the second half, Romo engineered a miraculous comeback. He turned what should have been a blemish on his career as a Cowboy into one of the most memorable comebacks of the season.

Like Romo, Dom had an unprecedented bad day with his trading. He incurred major losses earlier that morning and could not break out of the losing streak. He recalled that during the morning he felt, "paralyzed" and became "obsessed" with getting his trades right. Dom continued to press through lunch and started to make even more impulsive and haphazard trades than ever before.

He never took a break from his trading console, and each successive wrong decision felt more and more crippling as the day came to a close.

The Diagnosis

Dom had become a "hemophilic trader." With each bad trade, his bleeding became more pronounced. He could not stop the bleeding and felt out of control.

The Prescription

Whenever traders get too caught up with mistakes and wrong trading decisions early on in their days, they become vulnerable to having even worse afternoons. If they do not take a break from their computer screens, they will not be able to continue to make objective and sound decisions. They tend to obsess over their mistakes and may begin to trade to avoid losses, rather than to trade to make money.

Dom needed to recognize early on in the day that he was not seeing his trades clearly. He needed a halftime break to sit down, have some coffee, take a 10-minute walk or close his eyes. Sometimes traders, like quarterbacks, need to re-evaluate their strategy in an objective fashion. In order to do this, they must leave their computer screens and change their fortunes. Taking a break when you are streaking downward early on in your day is actually a form of discipline. The key is to identify that you are not seeing the ball properly early on and take action immediately.

In order to do this, set yourself up with a workable stop-loss that you are comfortable with. This benchmark should be your signal that you must shake things up with your strategy and take lunch. This will help you stop obsessing over recent bad trades. A break will ensure that you are thinking clearly and help you determine if you were making sound trading decisions earlier that day. Don't just keep throwing interceptions without taking yourself out of the game for a breather. Your returns from last week depend on it.

Please write to the Stock Doc with your trading, emotional or investing dilemmas. Dr. Cass always welcomes comments and stories, for which he'll try to offer solutions in later columns.