4 Questions To Ask To Find The Root Of Your Trading Problems

It’s a well-known fact that before a physician can begin to treat an illness or ailment, a diagnosis must occur. It’s the same process with engineers dealing with machinery, or mechanics working with cars: if you don’t know what the problem is then you can’t begin to fix it.

The same analogy can be applied to traders, and therefore trading problems. Time and time again traders facing problems will try various solutions without really stopping to assess what problem they’re trying to solve. Even worse, unlike doctors, engineers or mechanics, trading mentors will jump straight to the treatment without pausing for diagnosis.

This post will help anyone facing trading problems to identify what is going wrong, by asking a series of diagnostic questions.


QUESTION #1 Do I actually have a problem?

You probably think that’s a weird question to be asking when you’re experiencing a drawdown and you’re becoming frustrated. But, even if this is happening, there might not actually be trading problems. Any experienced trader will tell you that trading isn’t a sure thing, and that even if you’ve got all the knowledge and experience in the world it’s still possible to find yourself failing. After all, markets are uncertain and Sharpe Ratios aren’t always as you’d wish them to be, no matter how skilled you are.

Because of this, the likelihood of down-periods is highly likely.It’s not unheard of for golfers to miss a hole, and you wouldn’t be shocked if a soccer player missed a penalty; well, trading is exactly the same. Even if you’re enjoying brilliant profits with a 60% hit rate, there will always be the other 40% where things aren’t so sunny.

To ensure that you actually are experiencing trading problems, it’s important to look at your trading success over a longer period than just a couple of days. For example, a frequent day trader who completes many trades per day would benefit from looking at the month’s results and comparing them to the rest of the year. But, a trader that works on a more long term basis will need to look at data from an entire year to be able to identify issues. Essentially, you will need to check that your recent results fall below those previous, and that your most recent drawdowns are different to past ones. To do this effectively, you’ll need that all-important historical data, because ifyou attempt it without, you might adjust methods that are actually working just fine. Assuming that you are experiencingtrading problems, abandoning a system can make things much worse and can actually be the source of your problems rather than the cure. Don’t be tempted to abandon a method that has worked for you in previous months and years, just because of a drawdown (which, as already discussed, is a normal part of trading). In other words: don’t panic, diagnose.

If a problem does exist, it might be down to taking too many risks for your loss tolerance, rather than your actual methods. Doing this can cause a “risk of ruin” scenario, which clearly needs to be avoided. If you think this may be the case for you, review your hit rates along with your average win and loss statistics; doing so can be instrumental in diagnosing whether your trading problems lie in your risks or methodology.

Even if you conclude that there isn’t an issue, you should still consider keeping in-depth records of your performance metrics. Then, if you do experience a genuine problem later on, you’ve got all the data you need to make a diagnosis. If you are new to trading, you can compare your results to those obtained whilst using simulation mode.


QUESTION #2 Are your problems related to the market(s) you are trading in?

Instead of first assuming that trading problems are due to your methods, consider also that the issue may lie in the market, or markets, in which you trade. Changes in the market can mean that previously successful methods begin to fail all of a sudden.

A perfect example of this scenario is the decline of volatility that the stock market has experienced recently. Traders making profit via momentum and trend trading are now struggling because of low volatility; this has frustrated many traders and has discouraged them from trading boldly.

To diagnose whether the market is the source of your trading problems, speak with colleagues and mentors who trade using similar methods to you. Are they also experiencing issues with their trading? If you find that drawdowns are similar across the board, it’s safe to conclude that it’s no coincidence, and that the market is the source of your frustrations.

It is scenarios such as this one that highlights the benefits of having strong relationships with others in your field, even if you are an independent trader. If you haven’t already done so, start reaching out and building bridges with other traders; you’ll no doubt need their input at some point in your career.

Another way to ascertain where your trading problems lie is by using performance indexes for hedge fund and CTA strategies. Tapping into industry sources is a brilliant way to identify which strategies are working, and which ones are not. A good example of this is Barclay’s short term trading index (STTI on Bloomberg). This index monitors the success rates of money managers who are trading short term momentum and trends. If we look at the performance reported in this index, we can see that it has been pretty terrible over the last two years, and we can conclude that the reason for this is the low volatility of the markets caused by plummeting interest rates.

You don’t need to worry if your trading problems are being reported widely within your markets. That being said, you also cannot simply ignore the issue, as changes in the market may be long term and will therefore require some action on your part. Traders need to be adaptable, and this is never truer than in this scenario. Use your knowledge and experience to decipher what your approach should be, and then apply your new method and monitor your results closely. Look for mean reversions and/or relative value strategies that compliment your trading style, and you should enjoy diversified returns and steady profits and losses.


QUESTION #3 Do you have any personal problems in your life?

This can be tough, but once you’ve considered how the market is performing it’s time to turn the magnifying glass on yourself. How is your life outside of trading? Are you suffering with anxiety or depression? Are there aspects of your life that make you sad or angry? Do you struggle to stay focused? If so, it’s likely that these issues will be showing themselves in your trading. For example, do you have a short fuse when it comes to dealing with your friends? If so, you may notice that you express that same impulsive behaviour at work, which can cause trading problems. If you identify that you have problems in your life in addition to trading problems, you might want to consider seeking professional help.

Medical professionals suggest that personal issues such as relationship breakdowns and mental health problems would benefit hugely from cognitive, interpersonal, psychodynamic, behavioural, and solution-focused methods. By working on active exercises during sessions and also at home, issues can be resolved or minimized. Many aspects of trading psychology can be dealt with via traditional counselling and/or therapy, so this should be something that you seriously consider if an issue is apparent. 

It should be noted, however, that depending on the severity of the issue, long term help may be required. If you’ve been suffering with personal problems for a long time, or if your issues are impairing your ability to live a full and happy life, it’s important not to expect a quick fix. For example, if there are hereditary family problems or you are abusing drugs or alcohol, it’s important to take this very seriously. Just as when dealing with trading problems, looking for quick fixes can lead to even bigger problems in the long run. The cure may be intensive therapy, or medication may be required. Whatever it is that you need, it’s imperative that you allow yourself the time to get help.

Emotional and mental illness is a significant issue within society, and traders are obviously not exempt from these issues. It is important not to assume that any anxiety or depression you’re experiencing is due to trading problems or trading psychology issues, as this may cause you to focus on fixing your trading methods rather than fixing yourself. If you notice that your trading is being affected by your problems, it’s more than likely that other aspects of your life need to be looked at.


QUESTION #4 Do problems arising in trading need a deeper mindset fix, or would trading mentoring be more beneficial?

The most important thing here is to ensure that you can distinguish whether this is definitely the case. Frustrations are common in traders; especially for newer traders that are still learning and making mistakes. For scenarios such as this, it is the trading psychology of the individual that needs work, rather than their mental health in general. It may be as simple as the novice trader being coached to avoid common mistakes that are causing them anger. It isn’t only young traders that experience frustrations though. Even the most experienced professionals will experience drawdowns which might have been picked up on by a mentor. This common issue is another reason why it can be useful to build a network of traders to discuss ideas and share problems with.

When your trading psychology is a little off center and is linked to drawdowns and losses, several psychological methods can be beneficial to resolving various problems. If you are experiencing anxiety and/or pressure to perform, behavioural methods such as exposure therapy can be very useful. However, if your issue is more to do with overconfidence or the need for perfection, cognitive restructuring can make a huge difference to your outlook.

Additionally, if you want to take an in depth look into your trading methodologies and expand upon them, solution focused analysis might be for you.


  • Behavioural methods - These techniques are centered on developing skills that you practice in real time whenever you come up against a problematic situation. This type of trading psychology teaches you new habits and skills that you can apply to trading, as well as other aspects of your life. An example of this would simply be to take a short break from trading if you feel anxiety setting in, or if you feel disheartened by trading problems. Behavioural therapy will teach you to recognize when you aren’t in the right state of mind to trade, so you can take a break before things become too much. While you take your break, try to do skills-building activities such as relaxation training.Where possible, try to practice your behavioural techniques outside of trading hours, so it’s easier to integrate them into your day-to-day life.


  • Cognitive restructuring - These methods work to change negative thought patterns that can skew your emotional responses and affect your decision making abilities. A common example of this is traders being extremely self-critical when experiencing trading problems. This negative emotional response can have a serious knock on effect for future trades, and opportunities can be missed.By undertaking cognitive restructuring the trader learns to recognize thought patterns before they lead to negative trading psychology.


  • Solution focused techniques - Want a repeat of those times that you did your best trading? Solution focused techniques work by identifying your behaviour, practice and process during those times, so you might repeat your success. By using these techniques, you can learn what works best, and do more if it and enjoy more consistent results. It’s that simple!


To summarize, how you manage your trading problems should depend entirely on your diagnosis, just as a doctor relies on theirs. Sometimes issues will be due to changes in markets, sometimes it will be because of your psychology, and sometimes there won’t actually be an issue and it will just be a normal downturn. Good trader psychology is all about being honest with yourself and taking the time to make the correct diagnosis.  

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