Sep 302010

In A look back on my journey – Part 1 I wrote about being profitable yet having a couple of issues in my trading, namely using loose or no stops, and “scaling in”.  This led me to rewrite my trading plan during my summer vacation.

Before continuing the story, I want to go into more detail about these issues because I believe yesterday will prove to be a turning point for me in my trading.  Just like a smoker stops smoking cold turkey, I’m going cold turkey with the issues that are holding me back.  And since this happened yesterday, I think it’s good to discuss it now before continuing the story of the trading plan.  For you see my trading plan was focused on my beliefs about the markets and my setups, seriously neglecting the issues holding me back.

Yesterday I made 10 pts trading ES.  You’d think I’d be happy.  But I’m a perfectionist and my trading was far from perfect yesterday.  Actually I don’t think I traded well at all.  In fact about I’m about to go back to simulator to work on my issues.  “Go back to simulator after a 10 pt day?” you’re thinking?  Yes, and let me explain why.

First the trades.  These are all real money trades, I mention that because as I said, I’m about to go back to simulator.

Over the past few months I’ve done a lot of analyzing and thinking about my trading.  That led to a complete rewrite of my trading plan, which is an ongoing process.  I’ve identified several issues that are holding me back as a trader.  I’ve known about these for a while but I guess I was hoping they’d go away.  Since I observed all of them yesterday, they’re obviously still there.

The main issues holding me back as a trader:

  1. I want to be right and I hate losses.  This comes from my engineering background, particularly in software development.  My education and career have been based on proving software systems correct (a significant portion of my software career was focused on automated testing of software systems).
  2. Due to my hatred of losses, I tend to move my stops to avoid being wrong.  This often puts me in a hole.
  3. To get out of a hole, I often “average down”.  I used to call it “scaling in”.  I don’t just do it randomly, I only will scale in if I get another setup.  So call it “semi-intelligent averaging down”.  But whatever you call it, I’m now convinced it’s not good.
  4. My fear of losses causes me to close trades early when the come back towards my entry.  This means they can never hit my target.

So let’s look at how these three issues affected my trading and how they are holding me back by analyzing each trade:

  1. Great trade.
  2. In this trade went 2 pts against me and then went 2 ticks in my direction and then came back to my entry.  The thought of a loss bothered me and I hit the panic button and closed the train for a gain of 1 tick.  The market went on to hit at least my first target. (Issues 1 & 4)
  3. This trade was almost perfect, no issues.
  4. This trade didn’t move much and I got impatient.  It went 1 pt in my direction and then came back and I got out with 1 & 2 ticks.  It then went on to hit my first target.  (Issues 1 & 4)
  5. This trade I scratched.  I don’t remember why but I remember it going on to hit my targets (Issues 1 & 4)
  6. This trade went 2.5 pts against me and I scaled in and got out breakeven.  I used to be proud of my keen ability to do this, but now I know better.  If the market ran in the other direction I would have been faced with a large loss.  (Issues 1, 2, & 3)
  7. This trade went against me just 1 pt and I could tell it was going to stop and come my way so I added 1 contract.  JP calls this McGyver.  I’ll be writing about this in a future post. (Issue 3)

As I’m writing this I’m thinking that yesterday wasn’t so bad (I’ve had far worse!) and that maybe I’m being too hard on myself.  But here’s the deal:   If I don’t correct these issues, they’re going to hinder my progress and could even damage my account as they have in the past.

My goal is to trade 100 contracts on ES.  That may sound crazy but I believe if one can consistently make 1-2 pts/day without taking excessive risk, then one can slowly increase size and get to 100.  I put “without taking excessive risks” in bold because that’s key.  If one is trading without stops, it’s not that big of a deal with 2 contracts (assuming your account isn’t small).  But it’s not going to be possible trading 100 contracts while maxing out the acceptable risk.

I believe that in order to achieve my goal, I must trade 2 contracts exactly as if I were trading 100.  So here’s what I need to do to correct the issues:

  1. Accept that the market is random and that losses are to be expected.  Trading is not software development.  If I deploy a software application into production and it has a serious bug, then that says a lot about me and the team of developers and testers.  However if I trade a setup and it stops out, that says nothing about me personally.  I must not feel damaged by a stop loss.  I must learn to like small losses and not try to avoid them.
  2. I cannot average down.  Once I get to trading at my maximum size for my account, I cannot trade above it.  So I can’t average down.  I enter and get one shot.
  3. Since I’m expecting losses and I’m not afraid of them (per item 1), I must allow my trades to either hit the target or stop loss.  I must have a really good reason to scratch a trade, and this must be done infrequently.

That may sound simple, but it’s not.  So that’s my focus from now on.  I believe I have a good understanding of the markets and that I can identify good trade entries.  Five consecutive months of profitability has convinced me of that.  All I have to do is fix these issues and let the trades take care of themselves.

And that’s why I think yesterday was a turning point.  Despite these issues, I was still able to take 10 pts out of the market.  I see there is potential to be making a lot more.

Continued in Part 3.

  5 Responses to “A look back on my journey – Part 2”

  1. I really do like your thinking eg very disciplined. Well done and keep up the good work.

    All the best

  2. Have you ever tried to lock-in some profits (at least moving the SL to BE) after the market has moved in your favor ? That could avoid your primary SL of being hit and ending up with a loss…

    I’ve used an EA (I use MT4) to manage that, and – of course, this strategy is not perfect – sometimes it keeps me from ending up with a profitable trade (due to being stopped at BE), but many, many times it keeps me from ending up with a loss (due to market reversal, and being stopped at BE).

    Of course, like any other, my strategy is not perfect, but this simple attitude enhanced my trading life.

  3. Hi Beto, this is precisely what I do. I put a first target around +4 ticks and when it’s hit then I’ll exit before the second target gets to -4 so I have no risk. I’m more of a scalper so when price starts retracing I’m usually out.

    Today the bund went 3 ticks in my direction and then pulled back. I got out +3 on T1 and then it looked like it was going against me so I scratched the T2 at entry for a total of +3. Then the market went in my direction over 10 ticks without me. It happens. But the advantage is I usually get my +3-4 ticks and have few losses.

    Thanks for sharing.

  4. Hey Michael, I feel glad you were already aware of this strategy. May the market Gods be with us ! =)

  5. You nailed the problem so well. (moving stops, wanting to be perfect.
    excellent stuff thankyou

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