Mr. Market always has a unique way of zapping your confidence just when you need it most. During times of increased volatility this can take place simply by trying to follow the chaotic, up and down action while seeing your P&L gyrate in a correlating fashion. The problem for most individuals is they enter a downward spiral where lack of confidence leads to scared trading, which leads to losses resulting in more lack in confidence. Ultimately, their frustration reaches a maximum and they throw in the towel at the very moment when the action changes and their positions start working.

If you have been trading for longer than one day you are fully aware that losses can come which can take a whack at your confidence; however, throughout my years of trading, I have seen other issues that if dealt with, can significantly assist an individual in making sure they never get to that point where all hope is lost and the towels come out.

1) Adopt a set style: This sounds so basic however if I were to ask you to articulate exactly what your style of investing or trading is, could you? No, not just ‘buy low, sell high’ but the actual method in which you seek out trades, execute them, set stops and book profits. What stocks to you favor? What environment suits your style the best? So often, I see traders attack the markets without any plan in hand and it is only a matter of time before Mr. Market chews them up and spits them out.

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2) Stick to your style: Naturally after one has a set style that they can articulate and follow, sticking to it is key. This remains one of the hardest rules in trading for most, as the market remains in constant motion challenging your style every day. For example, lately the allure of stepping in and trying to play the bounce in some financials may look appealing however if it is not your normal style of trading, why take the risk? Learning a new style is fine and there are many out there that work, however attempting to learn a new style with hard cash is setting you up for failure.

3) Move slow: When your confidence has been zapped many traders natural instinct is to hunker down and go to war with Mr. Market letting the strongest man win. Let me tell you, adopting this machismo attitude will only cost you money. The markets have a way and take pleasure in bringing traders to their knees and kicking them when they are down. Rather than looking to regain losses and boost your confidence overnight, understand it will take time and hard work, and can only be done by moving back in very slow.

4) Keep it small: Whenever I go through a trying period and my confidence is shaken, I first make sure that I my style is firm (#1) and I have not deviated (#2) once I realize it will take time and I must move slow (#3) in order to get my confidence back, I start to wade back in, in very small increments. Doing so allows me to keep any further losses at a minimum and avoids any further damage to the already shaken confidence. Once I feel comfortable once again with the small trades, I gradually increase the size in lockstep with my growing confidence. As time goes on, I am back to my normal position size and trading with confidence.

Everyone knows that the financial markets want to take shots at your capital, however what people overlook is just how humbling the markets can be and the confidence that can be shattered if handled in an inappropriate manner. Understanding that there will be times when your confidence takes its hits is the foundation for understanding what to do about it. The steps above have worked well for me over the years and I hope you too find some value in adopting them as your own.

Futures are slightly higher on the heels of some strong international gains, and what is at least perceived so far as a solid Cisco (CSCO) report. As Toddo pointed out yesterday, the real reaction regarding the Fed’s decision or lack thereof should be seen today and at least in the early going, I don’t see any reason to rush a thing.

Go get ‘em today