Learning to Take Pain

gmanGilbert Mendez's (Gman's) Blogs12 Comments

In our training program we (over)emphasize finding opportunities where the risk is one unit and the reward is at least five units. Most of the setups our new traders learn (50% I would guesstimate) are opportunities where the risk is literally one to two pennies. If overly abused, these setups can progressively hinder the ability of the trader to pull the trigger on positions that require more risk on trades with the same 1:5 reward ratio. Let me explain.

Take for example a play off the Mush Playbook. Mush is the most consistent scalp trader on our desk. The ultimate Mush scalp play, a momentum scalp play, is a “risk-free” play. When executed to perfection and without hesitation the play offers a win rate of at least 70% I would have to guess. The trader is theoretically never out of the money for the 1–2.5 seconds of the duration of the play. In essence it is a risk-free play as the trader is taking advantage of the momentum to get stock and never be out of the money as the price will move in the desired direction instantly. The play offers very little pain to the trader and offers instantaneous reward.

Now imagine that you master four to five others for semi-instant-gratification, little-pain-involved plays similar to the one described above. When abused (80%+ of the daily P&L comes from these plays) then the trader can expect to progressively lose the ability to take pain. By pain I am referring to the ability to hold a position while it ticks ups and down until it gets to its destination. Then all of the sudden risking five cents or say 50 cents to make 25 cents or $2.50 respectively is not natural. The “pain factor” involved in holding a stock for a bigger move along with the lack of instant gratification can make the trader very uncomfortable.

The inability to take pain will almost always force the trader to get out of these setups way too early. When analyzing the numbers the trader realizes that the math doesn’t add up and concludes that those set ups are not worth it for his/her style. Oh, are those dopey conclusions just dead wrong. The problem is simply not being mentally prepared to take pain on the positions.

If you feel you are subjected to this psychological barrier, here’s my list of suggestions to pump some iron into that mind of yours:

1. The first step is to force yourself to make the trades with the smallest possible size, 100 shares. Add 100 shares to these plays for every three to five well-executed trades. The idea is to grow slowly on these plays.
2. No matter what you see on the box you cannot try to scalp the same stock for the duration of the play.
3. If you cannot control yourself and do chose to scalp the play, you must eventually get back to your original size. Most importantly, you have to be willing to treat the entry price as if it was your original one.
4. This last point is crucial and will require some serious amount of visualization exercises. In particular, visualizing being marked down on the position much more than you originally planned.
5. Do more visualization exercises to help you get comfortable holding stock for an extended period of time. The exercise should include holding a position from being deep in the money to almost flat to deep in the money again. Get creative, imagine any possible combination that can keep you from holding the position.

Like we always say, we must have many plays in our quiver. Learn to take pain on your positions and not by giving them more room to the downside!!. Adding a play in which you hold for a significant move will certainly improve your results dramatically. Mastering a few scalp plays will help you reduce the variance in your daily results. But you must not let your feelings dictate what kind of trader you are. Instant gratification is awesome in trading but it cannot become your best friend.

Happy Trading. Don’t forget to follow us on Twitter!

12 Comments on “Learning to Take Pain”

  1. very good post, i’ve been feeling this myself. Sometimes I get too used to not risking much that i pass some opportunities even though they might be profitable

  2. very good post, i’ve been feeling this myself. Sometimes I get too used to not risking much that i pass some opportunities even though they might be profitable

  3. You mentioned one scenario that gets me angrier than a crocodile in the visualization part. So we enter a trade short there may be a minor support level 20c lower and the big kahuna support level 70c lower. I kick myself when the minor support is hit only to hold it back to my entry point. Here I think I could have just made that spread and then the price may go to the big kahuna level after I took a small profit or let the thing stop out. I feel like I get in a damned if you do, damned if you dont scenario. Thanks for the post gives a few things to think about.

  4. You mentioned one scenario that gets me angrier than a crocodile in the visualization part. So we enter a trade short there may be a minor support level 20c lower and the big kahuna support level 70c lower. I kick myself when the minor support is hit only to hold it back to my entry point. Here I think I could have just made that spread and then the price may go to the big kahuna level after I took a small profit or let the thing stop out. I feel like I get in a damned if you do, damned if you dont scenario. Thanks for the post gives a few things to think about.

  5. This can become an issue for me because my primary entries are at what I call primary support/resistance areas. As a result, MANY times when I set a buy/sell stop limit order for a break of primary S/R, the stock will run right through my entry (triggering the entry) and keep moving to put me immediately in the green. However, rather than scalp the entire position, I like to shed a piece into the initial move at the first stall, then sequentially as the stock hits my targets (I leave the last piece or two on as I raise my stop when a position has exceeded my risk-reward target).

    Anyway, since the majority of my trades “pop” favorably, over time I become more averse to trading pullbacks. I also tend to dump slow movers that turn out to be excellent trades. I think of it as getting spoiled.

    Lately I have been working on forcing myself to take at least 1 or 2 trades a day that are not the 70-80% “pop” in my favor trades. I know that many pullback to support trades have even better risk-reward ratios, but I have to get unspoiled to take them consistently 😉

    Great post! Thanks!

    Damien

  6. This can become an issue for me because my primary entries are at what I call primary support/resistance areas. As a result, MANY times when I set a buy/sell stop limit order for a break of primary S/R, the stock will run right through my entry (triggering the entry) and keep moving to put me immediately in the green. However, rather than scalp the entire position, I like to shed a piece into the initial move at the first stall, then sequentially as the stock hits my targets (I leave the last piece or two on as I raise my stop when a position has exceeded my risk-reward target).

    Anyway, since the majority of my trades “pop” favorably, over time I become more averse to trading pullbacks. I also tend to dump slow movers that turn out to be excellent trades. I think of it as getting spoiled.

    Lately I have been working on forcing myself to take at least 1 or 2 trades a day that are not the 70-80% “pop” in my favor trades. I know that many pullback to support trades have even better risk-reward ratios, but I have to get unspoiled to take them consistently 😉

    Great post! Thanks!

    Damien

  7. don’t know the guy mush, but if he is a master scalper, he is what he is. you don’t try and teach a pure shooter how to post up or drive the lane but he’s still good for 10-15 solid ppg.

  8. don’t know the guy mush, but if he is a master scalper, he is what he is. you don’t try and teach a pure shooter how to post up or drive the lane but he’s still good for 10-15 solid ppg.

  9. Thank you all for the comments.

    Steve, the post was intended to highlight the Mush play and the psychology behind it. Though he is the master scalper on our desk, he has slowly added the long term play to his game. He knows it is in his best interest to be in the bigger picture plays. Happy trading!

    gman

  10. I want to reiterate what gman said with respect to mush. SMB seeks to create well rounded traders. This allows for maximum profitability in all market environments. The growth of traders on our desk is an organic process that in no way is forced upon the trader.

    I will draw a simple analogy to sports. Take a look at ben gordon’s game. He is a great pure shooter but he has added so much more to his game through hard work. Take a look at the contract he signs this offseason…

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