How to Avoid “Deer in the Headlights” Syndrome

Jun 6, 2007: 8:35 PM CST

If this scenario has not happened to you, you haven’t been trading enough:

You’re excited. You see your set-up or read a great news report on a company and can’t wait to execute the trade. You do, buying a bit larger position than you’re used to, but this is the ‘sure fire’ trade they say that will make your year right in front of your eyes. Excitedly, you watch as you start to make money!

Suddenly, without warning, something goes wrong. “Why has the stock retraced to my buy point?!” you ask. “They must be shaking out the weak hands. I have to be strong!” you exclaim.

Before long, you’re underwater, but that’s ok. You didn’t bother to place a hard stop yet because, well, this was a great trade. Or maybe you did place a stop and you pulled it out when the market approached, sure that the market would reverse right when ‘they’ took your stock away by wicked stop-running tactics.

So now the stock has blown through your original stop and you’re still in the trade… losing money as a flood of (in this case) sellers are entering the market and driving the price lower against you.


You don’t know what to do. Your palms are sweating, your heart is racing and your head is pounding. “How could this be happening to me [again]?!” you exclaim.

You have just experienced “Deer in the Headlights” Trading Syndrome. You’re in a situation you never anticipated and you’re losing money faster than expected. You know you should exit (or get out of the road or oncoming traffic) but you can’t.

I can point to at least three occasions in my personal day-trading where this has happened and they stand out in my memory because they cost me so much money and I felt horrible for days after experiencing such unexpected and deep losses. Events like this force you to the crossroads – either you quit and walk away disgusted or you get back up and learn your lesson and vow never to let that happen again.

How can you prevent this from happening?

This is a little harsh, but really the only way to ‘overcome’ this is to have it happen to you personally – and I don’t mean superficially. I mean, you have to have an experience where it hurts your account, your pride, everything. But for those of you to whom this has not happened (and you are actively trading… especially day-trading), it will and the best thing to do is be prepared.

First, include this (or a similar) sentence into your trading plan:

“I will honor my stops” and “I will only take positions that are within my position sizing limits” or alternately “I will not take positions larger than normal” (define what this means for you personally.

But IF you violate these rules (that’s ok – don’t beat yourself up too much yet), then there’s one thing left to prevent a catastrophic loss that erodes days or weeks of profits:

When you are psychologically frozen, TAKE ANY ACTION AT ALL to unfreeze yourself.

What do I mean? Place a physical stop. Place a bracket order. Hit the “sell now” button. DO SOMETHING.

When you take action, you physically release the ‘block’ on your brain functioning. It might be the wrong action at the time, but it is an ACTION. Perhaps the stock will reverse but you can’t take this chance. Don’t lower your stop to the next technical decision node, be it a trendline or a moving average or a Fibonacci projection. Your mind is clearest when you evaluate risk/reward and support/resistance when you don’t have a position on. Negative psychological effects are at their lowest when our trading account is clear of positions and we can evaluate a bit clearer.

Technical analysis deals strictly in probabilities, not certainties. You cannot AFFORD to play in probabilities when you are rapidly losing money. It is best to kill the trade immediately, or alternatively, place a hard exit stop just below the current price (market order, that is, not a limit order. When you want out, you want out. Don’t play games for a few cents). If the market takes you out, at least the ‘pain’ stops. Odds usually favor the stock continuing its rapid descent rather than reversing. In the rare cases the stock does reverse after your exit, that’s fine. It’s just probabilities. You cannot AFFORD one trade to continue to go against you and negate weeks of profits. It is NOT an option and you must prevent large losses literally at any cost.

In summary, when you are gripped by fear and frozen by a rapidly losing position, TAKE ANY ACTION in your account – exit immediately or place a market stop-out order slightly away from price but do NOT play games, do not perform sophisticated technical analysis, and do not remain motionless.

When a car hits a deer, not only is the deer ‘damaged,’ (or killed) but so is the car (and sometimes the people in it).

When the market hits you like a car, the market is never the one injured – you are. Sudden catastrophic losses may destroy something more valuable than your trading capital: Your will to trade and your hopes and dreams in one fell-swoop. Prevent this above all else.

(deer in headlights guy picture credit:


7 Responses to “How to Avoid “Deer in the Headlights” Syndrome”

  1. Josh Says:

    Couldn’t agree more.

    When my wife and I started trading we did pretty well for the first 3 weeks.. made about 30%!

    I thought I had it all figured out. but then…

    My biggest loss was pretty much 50% of my account balance. I placed a short with no stop (a mental one I suppose).. the market pretty much went against me form the start and I was out by a chunk.

    I called my wife and explained the situation.. confident it would come back down. It did.

    It got to within my “mental stop” range but I still didn’t close it out. I waited.. It went back up..

    I went to bed that night with a large (potential) loss in my account.

    My wife woke up around 3am and checked the account. We were out by a *LOT*. She woke me up. We decided to place an opposing buy order at the current value to “hold” the position and figure out what to do in the morning.

    In the morning we were staring down the barrel of a $7,000 loss (we had about $14k in the account at the time).

    Of course, guess what? The buy order we placed to ‘freeze’ the position was the TOP. The market came back down, even went below my original short but the combined trades were still in the red.

    After trying to trade my way out of the situation, we eventually gave in and closed both positions. A 50% (or so) loss.

    It was those events (over 3 or 4 days) that finally made me put a HARD STOP in each and every single trade (by “hard stop” I mean our provider will close the position automatically if it’s reached).

    I now *NEVER* place any trade without that hard stop… and you know what? My trading is better for it. When the stop gets hit – 95+% of the time the trade was ‘wrong’. Coincidence? 🙂

    Anyhow, that’s my story. I’m not sure if it helps as I agree that, until you have experienced the anxiety of a 50% loss sitting in your account, you really can’t fully embrace just how important stops are!!!!

  2. Corey Says:

    Absolutely! Thank you Josh for sharing your story.

    When I first started, I just did news related momentum day-trades on stocks under $10. I went in with 1,000 shares and tried to capture 30 or 40 cents for $300 or $400. No technical analysis – nothing. Just motion.

    6 of my first 7 trades were profitable and my one loss was $400 – not bad. I was making $200 – $700 per trade. Then the “Deer” got me. It was very similar to what you described where I had a mental stop, it hit it, dropped me down $1,000, went BACK up to where I bought it (and I didn’t get out because I was so shocked it happened so quickly and I figured the worst was over) then it dropped down $1… then $2… then I closed out half the trade (I actually was so confident that I bought 2,000 shares – 2x my normal position).

    It was on a Friday and you bet I had a horrible weekend. By the time Monday rolled around, the stock gapped down $1 and I sold 50c later (on the downside) because I was frozen. Yah – that cost me about $5,000. Half my account also.

    In the first month, I rode my account up 20% then saw the value drop about 40% within one weekend. That’s enough to beat the lesson into you that the market isn’t all fun and games and must be treated with a business-like approach with education and risk management. Like you said, absolute stops (and discipline) are required!

    Losses of that magnitude have never happened to me since then, but I’ve had some overnight gaps whack me unexpectedly. It’s part of the game, really. Learning how to deal with it is the second part.

    Thank you again for sharing!

  3. Active Trader Says:

    Well, unfortunately due to your blogs name, your site will likely become real popular after this weeks market performance. I lost quite a bit even though I was correctly position sized and exited directly after support breaks. The good news is that these same rules keep me in the green enough to survive weeks like these. It comes with the territory that after times like this many traders will become afraid. Only time and experience can really iron through the wrinkles. The good news is, the turbulence never lasts for ever. I will sit mostly in cash for a few days…if not all of next week just to see what the market has in store. How do you adjust your trading style after a short pullback? Times like this present an even bigger question mark than normal. It’s like the market is at a 3 way stop sign with no turn signal on. We must wait and see which way it heads before we can try to follow. Take care.

  4. Corey Says:

    Active Trader,

    Discipline and keeping to my stops has kept me around as well. I went through about a year when I had almost all stops too close and was too conservative which decreased returns and winning % of course, but it certainly kept me around longer to learn so much more.

    I’ve been positioned with entry stops (short) for a while and a few were triggered yesterday and I went a little aggressive today to help make-up for the conservative (doubtful) stance I’ve had on the market for a bit. I’m not saying this is the end all of the bull market – absolutely not. But the indexes had been developing momentum divergences and grossly overextended conditions for about two weeks now.

    In terms of changing my trading style (personal observation) I follow momentum and price swings and try to place entries at the bottom of an observed swing to ride up to the crest of an upswing and chose selectively when conditions may be overextended (or swings are extended) and look to fade these moves as evidenced by divergences in buying/selling power and price. I am also a short-term trader with an emphasis on market ETFs and leading large-cap stocks.

    I’ll be posting a bit more this evening regarding the state of the market from a ‘swing chart’ perspective and momentum perspective. You’re right. This is tough. Trading is difficult. It almost seems when we’ve got it all figured out that the market pays us a valuable visit and collects expensive tuition from us. I’m not immune either. No one is. I still take some knocks but – just like you mentioned – hold fast to my stops and position sizing, simply because I’ve lived experiences where I didn’t and it cost me.

    Thank you for your comment and sharing your experience.

  5. Anything-Goes Says:

    Wow, great stories. I came to this blog by reading the name of it. I have recently lost all the confidence in my setups because of a few REAL losses that I took in day trading eMINI’s as soon as I started real trading. I started equity trading back in march and then moved onto futures in august and did quite a bit of paper-trading after a while just the beginning of october I started real trading and made a good profit on the first day and was happy to have finally started to make money. Then the following two days I lost about 300% the profit I made and it totally devestated me. I still cannot get back to trading as I don’t trust my setups anymore and have come back to paper-trading again. However, these stories give me confidence and hopefully I will be back up again.

  6. Corey Rosenbloom Says:

    Thank you for sharing your experience.

    It hurts – I know. Many professional traders have stories of “losing their shirts” at some point in their career – perhaps it is some sort of strange initiation, but it happens, especially when you start making money consistently and you ramp up size in overconfidence (as I did),

    It is perfectly fine to paper trade to regain confidence. The worst thing you could do would be to walk away, which seems like the easiest thing to do. Take a break if needed and get right back into the game with documenting as much as you can on paper and seek out outside or internet resources/articles/books as need be.

    I am hoping to create a resource of stories of overcoming fear along with personal experiences from which we all can benefit.

    If I can be of any assistance, please let me know.

  7. gourav Says:

    Nice post