Trading Psychology - Self-Sabotage

This post is about something I discovered while algo trading recently. The issue I seem to be having is due to multiple losses and fear of another loser or fear of losing money in general. Despite letting an algorithm trade for me, I still end up screwing up the trade by taking losses too early without letting the trade play out and work.

Here is the definition of self-sabotage from Psychology Today:

Behavior is said to be self-sabotaging when it creates problems in our life and interferes with long-standing goals.

It all goes back to “Trading in the Zone” by Mark Douglas. My losing trades are mostly caused by myself not fully trusting the algo or not fully accepting the risk of each trade.

I started algo trading at the beginning of this year and actually found a little bit of success; then I had one “large” loser that stopped me out of a trade due to the stop loss not being at the correct price. That trade would have worked if it were not for that technical error. Next, there was a trade on $USAT that wasn’t really working so I stopped my algo when it was about to trade $MBOT. I couldn’t stand having yet another losing trade.

Because of that first big losing trade, I stopped trusting it to make proper decisions despite seeing trades work over and over in my paper account. And guess what happened with the $MBOT trade it wanted to take? An easy win that worked almost instantly that would have taken out both losses. In fact, I would have been profitable on the day because it would have sold $USAT sooner rather than getting stopped out.

$MBOT 5m candles

I am sabotaging myself by not letting it take every trade or not letting the algo decide when it’s not working and it should get out. It follows rules so I don’t have to think.

Today, on $MBOT again, I did not like how the stock was acting so I sold it too soon. The trade worked without ever touching my stop price.

$MBOT 5m/1m candles

The Solution

The only thing I can come up with is to size down even further so the risk is a $5 max loss instead of $10. This is not much money either way but it feels like a lot if you have one double digit loser after another.

Once you’re in a trade you have to stop thinking. Risk is set, there is nothing else to do but wait. Some trades will work instantly and others will take time to get going.

This week has been pretty tough and the most trades I’ve ever taken in a day or even week. I’ve sized down to $5 of risk so tomorrow I’ll just sit on my hands and let the algo trade each setup.

I have “Trading Psychology 2.0” on my shelf but it’s tough to get through. I’ll force myself to read it at some point.

At least I’m aware of this problem so I can try working towards a solution. I don’t need income from trading so it’s not a “life or death” situation. These small losses don’t matter in the beginning. I’m only just getting started.