Podcast – Episode 32 – 4 Steps of Dealing With Losses

Podcast Transcript

Hey, guys, it’s Allen. I just want to start off by saying I apologize if the audio quality is not that good today. I’m recording this in my car. I’m driving around. I don’t even know where I am. I just got in the car, started driving. I’m in the middle of some farms and cows and stuff. That’s all I can see. I don’t even know what road I’m on, but basically, what I’m doing today is I’m going through what I call the four stages of overcoming losses.

Today is October 11th. I don’t know when you’re listening to this, but it’s October 11, 2018. Over the last week or so, the market, S&P in particular, dropped about 3%, which is not a big deal, but yesterday, it dropped another 3%. Today, it’s down another 1%. It kind of feels like the world is caving in, especially as a trader, we live in and die by how well we’re doing, and when you see red across your screen all over the place, it’s like your blood is coming out of your guts and stuff.

It feels miserable, so I am depressed. I am down. I am angry. I’m upset. It’s one of those days where you just don’t want to get out of bed. You just want to stay in the covers and cry, really. It wasn’t as bad now as it was back in the financial crisis. Those are day after day of wanting to just stay in bed and cry. I’m laughing about it now, but yeah, I did feel like crying about it this morning. I just wanted to be open and honest and raw.

I know you’re not supposed to, as running ad advisory and telling people how to trade and teaching, I’m not supposed to be like, “Oh.” I should be all motivation or be like, “Yeah, don’t worry. The market is going to recover.” Yeah, it will, but when you’re going through it, when you’re suffering those losses, man, you feel completely alone. You feel like the world is ending. You feel like, “Oh, my God, what the hell? I could’ve done something better. What did I do this for?” You second-guess all your stuff. Maybe I should go get a job,” all these kinds of things.

I mean, the losses aren’t that bad, right now, for me, at least, and so it’s not dire. I’m not giving up or anything, but it just feels really bad when you’re going through it, and so I wanted to make this podcast to throw a lifeline out to those of you who are also going through the same thing, or if you’re ever going through a series of really tough losses, I wanted to share the four steps that I go through whenever this happens to me. Hopefully, those will help you overcome.

Now, normally, there’s this woman, Elisabeth Kübler-Ross who came out with The Five Stages of Grief. If you’ve studied psychology in college or high school or whatever, you’d cover that. They got denial, and anger, and whatever the other ones, but when you’re going through a grief, when you have a loss, or when you lose somebody, or somebody dies, you go through these five stages, and everybody goes through the five stages.

You might do it differently. You might skip one, or you might spend a lot of time in one. You might get stuck in one, or you might do one, and then go to the next one, then come back, or go back forth, back and forth, but everybody goes through these five stages. If you’re having emotional issues, and you cannot overcome them, then maybe you want to go take a look at those five stages of loss. Just google it or something, and I’m sure you’ll find articles to help you through it.

What I do is when I’m dealing with trading losses, the biggest thing is that you have to overcome it emotionally, otherwise, you’ll never get back into the mental aspect of being able to do it successfully again. The first thing I do, step one, is really to get out of the pain. Whatever positions are causing you stress, whatever positions are causing you pain, whatever are hurting, I get out of those.

This morning, I had a big position in SPX. I had some weeklies on, and I had some monthlies on that expire a week for now. I mean, those are really painful because I’ve been watching this trade for the whole month, and now, a week left, and I just got to pull the plug because I can’t take it anymore. It’s driving me crazy. It’s like, “Oh,” every point that S&P drops, it’s like a dagger in my heart until I can’t take it.

I had a couple other positions where I was losing, so I just got out of everything, just got out every losing position. There are times when you want to get out of all your winning positions too, so everything is wiped clean. Now, you do this with your long-term holdings and whatnot, but short-term option trades, just get out of everything, just clean the board, fresh start.

Just nothing there to worry about, nothing there to think about because then you have to do stage two, and that’s the physical aspect, right, just getting out of everything. That’s stage one, and that will help you because there’s no more stress. There’s no more pain. Then you just have to deal with what you’ve already lost, and so that’s step two, which is to deal with it or to feel better about it. I should’ve given it a better name than that.

This is why I’m driving around because that helps me clear my mind. This is where you take as long as you need to. It could be a couple hours, depending on a loss. It could be a day. It could be two days a week, however long it takes you to get over that pain, that loss and you do what you need to do. I mean, you know yourself best. If you need to go for a run, a lot of people do that, go running, build up a sweat, go to the gym, do whatever, work out. Get over that loss.

If you need to take a nap, I used to do that a lot, and it’s not actually very … I thought it was beneficial. I thought it was helpful, but actually, it leads to more depression, but if you need to take a nap, you want to take a nap, go take a nap. If you want to get in the car and drive, do that. If you want to maybe go to a movie in the middle of the day, just get out, go to a movie. Get your mind off of it, and do what you need to do to calm yourself, to bring yourself back to center. That will help you.

Then when you’re done with that, then you move on to stage three. Stage three is reassessment, where you actually go through what happened. You go back and look at your trades. What was going on in the market? Why did you have these losses? Could you have done anything in advance? Was there any signs that you missed that you should’ve been paying attention to, or maybe you even saw but you ignored them for some reason?

This is a lot. We cover this part of it in one of our trainings called Trade Hacks, Trading Hacks, and I go through the different things that you can look for to signal when trouble is coming up and how to avoid that. As a human being, I made mistakes, that’s why I’m suffering these losses. That’s why I’m going through this right now. It’s hard to admit it, but I did not follow my own trade hacks. I probably could have taken action a couple days ago, a day ago, a week ago to save myself some of this, or limit it, but hindsight is 20/20.

You never know exactly what the market is going to do. You never know, but if I had followed those rules that I had laid out for myself, things wouldn’t have been as bad for my own personal trading, and so you have to go back and reconfirm yourself and say, “Yes, I need to follow my rules again. I need to get back in there. Go back to the basics. Go back to why I messed up. What did I do wrong? What did I not pay attention to?”

Once you’ve been trading for a while, in the back of your mind, it’s like, “Yeah, I know what I’m doing. I know what I’m doing.” It’s like when you’re starting to drive when you’re learning how to drive, you pay attention to everything. You pay attention to every little knob and dial, and every little indicator on the car, dashboard, but when you’ve been driving for years, put the key, turn the ignition, put it in drive, and just go. Then you’re not checking the rear view. Oh, I’ll get to that later. You’re not checking the side mirrors. You’re not checking how much gas you have.

You’re just going, and then you’re like, “Oh, wait, I got to do something. Okay.” You don’t pay attention as much as you should. In driving, you can autocorrect while you’re going along. In trading, if you do not, then things can happen. Bad things can happen if you’re not paying attention, and you could lose. Then in the market also, there’s no telling what the market could do, and so just going down a lot further than we think it’s going to do, then it really eats you up inside mentally and emotionally.

You’re like, “Oh, geez, man, I messed up.” It’s not the market’s fault. I mean, the market does what it does, right? We have to respond to it. We have to trade the market that we have. We can’t just wish for a market. This market, in particular, has been going up for eight, nine years, right? Now, we have a little dip. It’s not even a 10% correction, yet, but it’s causing me this much pain because I got too complacent. I got too, maybe, even arrogant that I’m just putting on trades in and working, and putting on trades and working, putting on trades, working. I don’t have to worry about it. I don’t have to worry about it.

You get lax. You fall asleep at the switch, and then a rude awakening happens, and boom, oh, man, oops, messed that up. These happen. It’s human nature. It’s going to happen. That’s why we trade options the way we do with built-in protections. When there is a loss, it shouldn’t be catastrophic. It shouldn’t just blow up your whole account. It should be contained, which mine are. They’re overcomeable. They’re still big, several percentage points, but I can still overcome them.

That doesn’t make the pain any less because the more you trade, the bigger your accounts get. When you have a loss, the bigger the loss is, and so you don’t look at it like a percent, “Oh, I lost 14%, oh, okay.” You don’t look at it like that. “Oh, my God, I lost $60,000. Oh, my God.” That will freak you out, anybody, it’ll freak out anybody. It’ll freak out a millionaire, like, “What? We lost $60,000. Oh, my God.” That’s just an example. That’s not an accurate number for myself, but I’m just throwing numbers out there.

That’s step number three, right, where we go back, and we reassess, and we say, “Okay, what did we do wrong? What could we have done better in the future?” This is where all the learning takes place. This is one of the most important steps that you cannot really skip. You cannot do this properly until you’ve completed step number two where you’ve actually centered yourself, and you’ve actually gotten over the loss. If you haven’t gone over the loss yet, then do that first because then step three will not be as effective as it should be.

Then once you’re doing step three, you go over everything. You look at the past. You try to go through the exact trade if you can. If you have some backtesting software, go through it day by day, see what you could’ve done differently. If there’s nothing you could’ve done differently, then you need to work on your loss prevention mechanisms. You need to work on your asset allocation maybe.

Find out what you could’ve done to limit the loss, and that’s one of the things that we cover in the Protect Your Portfolio book that I’ve written. That’s one of the reasons we wrote the book was to help people know what to do to protect themselves and hedge themselves in a situation like this. If there’s a bear market, or if there’s a flash crash, or if there’s a panic or anything like that, there are different strategies that you can use to limit your losses to protect yourself. What I’m talking about right now is I’ve already suffered the losses, so I’m going through these four stages of getting over it.

Then step four is to get back on the horse. You’ve gotten out of trouble. That was step one, exited all your trades. Step two, you’ve dealt with the pain. Step three, you went back and you tried to figure out what could’ve gone better if anything, and now, step four, you get back on the horse and you start trading again. Now, depending on how bad the loss is and how long or how the market is reacting determines the time when you get back on the horse.

Now, I just got out of everything today. I’m not getting back on the horse tomorrow. I’m not getting back into my trades tomorrow. I am going to wait for a significant amount of time for the markets to actually calm down themselves before I get back in. Does that make sense? You don’t want to jump back in. I lost all my puts today. I’m going to go jump in and call tomorrow, or in the afternoon, or I’m going to roll right now.

No, if you’re suffering pain, you don’t want to be rolling. You don’t want to be rolling. You don’t want to get more in trouble. If you’re suffering a lot of emotional pain, just get out of the trade. If your emotional balance is uncentered, if you’re not centered emotionally, you’re not thinking straight, you’re not trading straight, get out of the position. Get out of any position that’s causing you pain. I can’t stress that enough. That is the only way that you’re actually going to be able to think clearly and rationally again.

When you’re getting back on the horse in step number four, let’s get back in slowly. Let’s get back in once everything has settled down. Now, how do you know when things have settled down? Well, I like to do it when the market is not moving several standard deviations, or at least not even one standard deviation. If you don’t know what a standard deviation is, again, go look at that Trading Hacks program that we have, the trading program. It covers that in detail, but I want to see the market relax and calm down and move less than one standard deviation in a day or two days in a row before I would even consider getting back into the market when we’ve had a big decline.

That is one of my barometers. You need to come up with your own barometer. Don’t do it on a percentage basis. Today, the S&P is down 1%, which normally is not a big deal, but after coming off from yesterday’s 3% and 3% the last three or four days before that, it’s adding up. Tomorrow, if the market goes up 2%, I won’t be surprised, but that doesn’t tell me that it’s all clear. That could just be a snapback rally. The volatility is still going to be up, VIX has spiked considerably in the last three days, and so the volatility is still going to be there. That’s not enough for me to say that things are back to normal or calm again. Things are rational.

You don’t want to see big moves day after day, even up or down, up or down. You want to see calmness. You want to see everything come back to normal before you go back into the market and start putting your trades on. You have to remember that we are always going to have more wins than losses, but when we do have the losses, they’ll be larger. Right? The losses are going to be larger than the wins, and so they do hurt emotionally when they happen because we’re not used to them, number one, and number two, the numbers are bigger.

If you’re used to winning 100 bucks, 100 bucks, 100 bucks, 100 bucks, but then you lose 400. Oh, my God, that’s such a big loss because you’re used to the small numbers, you’re used to the 100, 100, 100, so if you lose 100, no big deal, oh, my God. It’s a big deal, right? We have to keep that in mind, and that is one of the things that we go through when we’re getting over it. We reassess, and we go over everything, and then we plan our next moves. We get back on the horse, and then we move forward because the odds are in our favor. They always will be, but if the trades are not going in our favor, even though the odd’s in our favor, then there’s something else at work. We need to figure out what that is. All right?

If you don’t know what it is, stay out of the market. If you don’t know why things are moving so much, stay out of the market. Do more research. Do more homework, but do not be trading until things calm down, things settle down, and you have a better handle on yourself, and you have a better idea of how the market is going to react in certain ways. If it’s calm, that’s when I want to trade. I don’t want to be trading crazy, choppy markets going up and down, up and down on a daily basis when nobody can predict and nobody knows what the heck is going on, and there’s blood in the water, blood in the streets. I don’t want to be selling options on those days.

This brings me to another point is the diversification that you should have, and we’ve recently just had something that we call passive trading, which is going to be a big deal for us. It’s a new way of trading options as well as stocks together and doing so in a passive way. Those trades that I’ve been doing with my passive trading are doing great. The stocks are down, but the options are making money, and when this decline stops, I’m going to be in a much better position with those accounts that are doing passive trading.

That is something that we’re going to roll out pretty soon. You’ll be hearing more about it. If you’re interested, email us, and we’ll give you more details about it. I’m actually in the process of writing a book about it, so it’s a new way of trading. It’s really cool. I’m really excited about that, so that’s something that I look forward to. For now, I just wanted to make this podcast. I hope this helps you. I’ve been through this process a few times, done it different ways, banged my head against the walls, screamed at my wife and kids for days on end.

Those were not very beneficial, so maybe that’s something that I should’ve mentioned in step number two where you don’t want to take it out on other people. You don’t want to take out your anger and aggression and depression on other people. If you have to, stay away from other people, if that’s you. I mean, you know who you are. I don’t handle losses very well, especially, we did have an Option Genius trade that lost money. We did have a weekly trading system that lost money, and I’m really, really, really upset about those, more than the other trades that I lost money on because I know that’s my own money.

When I lose on one of my advisory trades, that really, really pisses me off. I get really upset about that, but I need to be careful that I do not take it out on my wife, my kids. I was very depressed last night, and I was horrible. I didn’t eat well. I went out, got out a bunch of fast food. I got some more right now, comfort food kind of thing, but you do what you got to do for those couple of days until you recover and you get over it.

That’s the process that I’m in. I’m not going into the office for a while. I’ll probably go in later on. We do have a webinar tonight, so I have to go in for that. I can’t cancel that, but probably tomorrow, I’m probably taking a day off, just because I need to deal with myself emotionally and get back to centered as soon as possible so that I can continue. Take your time. Do what you need to do.

Do what you got to do, but follow these four steps when you have massive losses, and they will help you overcome, get over it. Get back on the horse, and get back to trading because if you do have massive losses, yeah, you can say, “Oh, I give up, this doesn’t work,” and make whatever excuses you want, but in the end, if you want to succeed, you’re going to have setbacks. You’re going to have losses. The market is going to give us losses. We have to learn to deal with it. If we just give up, then we’ll never reach our goals.

If this is a path you want to take, this is what you want to do, and I hope it is because it’s amazing, 99% of the time, it’s amazing. Maybe once a year, you might have a time where you’re feeling, at least, for me, I feel this bad. When I was learning how to trade, it was a lot more often. It was maybe once a month, but since it’s gotten better, I’ve been more in control over my emotions, and now it’s got a lot less. Follow these four steps, if you have any cover, if you have any losses, overcome them. This is how you do it. This is the plan. If you need any help, reach out to me, and we’ll be sure to help you out as much as we can. Peace. Don’t forget, trade with the odds in your favor. Bye.


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