Sep 202011

Last week, I posted a hypothetical trade scenario and asked what you would do.  If you didn’t get a chance to see it, click the above link and read it before continuing with this post.

A few people were kind enough to respond and I thought the ideas were quite interesting.  Markus expected more to the upside and would trail his stop.  Benko suggested something similar.  Market Monkey’s idea was to exit the long and get short which, coincidentally, is exactly what my monkey suggests every time I enter long.  Delta had a lengthy analysis and I really liked how he stressed the fact that it will either be a big win or a small loss, and if it’s a small loss it’s not a big deal.  His analysis is pretty much where I want to be in my trading, but I have to admit I’m not there yet.

So let’s look at what I did, which I admit looks pretty stupid in hindsight and that’s exactly why I’m sharing it here.  Not to make myself look stupid, but to get these issues out in the open.  To force myself to confront them.

Imagine if I had a trading coach.  He’d review my trades, point out where I did something inefficient and encourage me to stop doing it.  And he’d check my progress.  Unfortunately I don’t have a trading coach, but I think each one of us can be a trading coach to someone else.  And if we don’t have anyone then we can be a trading coach to ourselves.  This is starting to sound like Steenberger’s book The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist and I think that means it’s time for me to read this book.  It’s been on my list for a while.

So here’s my trades:

The first entry was perfect.  So why did I scratch it immediately after?  I really don’t remember.  But I do know that this is a bad habit of mine.  I don’t have time to fully analyze the situation (often because I was distracted by something else like surfing the web or chatting) and I don’t want to miss it so I get in.  Then once in I start analyzing the situation and this is where the monkey starts up.  “You don’t want to be in this trade” “This is terrible” “You should be short” “You’re going to lose your ass on this one buddy” “See it’s coming back, get out quick!” etc.

So for some reason I scratched a perfect entry.  So then it makes a new high and I see a pullback so I went long again with partial size.  After it bounced back up I entered the second half (at the same price).  Now this part I remember.  It came back to my entry after going 1.5 pts in my favor.  I held it.  Then it came back after going just 1 pt.  This was the third lower high.  I decided to exit the trade rather than take the chance on it hitting my stop.

The ideal stop would be below the swing lows which comes out to be 2.5 pts initially.  This trade could have made 4 pts easily as it went over 10.  I really blew it.

As Delta said, with a good reward:risk ratio, one shouldn’t be concerned about a stop loss.  Just put the trade on and let the market prove it right or wrong.

FT gave a great analogy once, he said taking yourself out of a winning trade is like making it to the final round of a boxing match and then you punch yourself in the face and knock yourself out.  And this is what I did here.

I’ve identified this behavior as a re-occurring pattern.  The root cause in my opinion, is being afraid of taking a stop. Why am I afraid of a stop?  For one I don’t get many stop losses so I’m not used to it.  I posted my stats recently and my win rate was extremely high.  Too high.  Some have even wondered how such a high rate is possible.  Here’s one way:  If your trade comes back to your entry you get out!  I don’t think this is optimal but I’m not sure about that.  So I need to investigate the other alternatives.

In my opinion, it is also partly caused by the fact that my average wins aren’t 2-3 times the size of my losses.  And that’s a major focus for me right now.  I was doing that a month ago, even got some 10 pt moves.  But lately it seems as if I’m out with a few pts when right and out with -4 when wrong.  I need to reverse that.

I plan to write more about this on the blog.  I think it’s more interesting than just posting a list of trades or the P/L.  I think spending the time to analyze the important trades can be much more helpful.  Let me know what you think.  I’m always open to suggestions.




  10 Responses to “Trade Analysis – Fear of Losing”

  1. Hehe, just did that today.

    Bought the first time we hit 96, it went to 97.25 and back to 96, I scratched, then it popped to 98 (my target). That is like your first trade, it is BAD.

    I think that your second trade management was OK, you had a lousy (sorry) trade location, and in cases like those whether it goes immediately in the right direction or you exit, it’s a momentum based trade as the market is already away from the support level.
    And the lower-lows are not encouraging…

    But I agree with what you say, having such an extreme high win rate (you said 98%?) probably signal you are afraid to take losses (how is your MAEs). But this is a step further from where I am, my fear of taking loss keeps me out of entering a trade…

  2. I did it again too. But I’m proud of myself because on my last trade I let my runner stop out. I rarely do that. So I’m making progress.

  3. I”m watching the dvd of Douglas about trading psych, I’m just at the intro, but he talks about the 3 stages of trading, starting with the “mechanical” stage up to the “intutitive” (the second is something in between). Anyway he mentions that while you are in the “mechanical” stage you can NOT move your stop because you don’t know if it is from fear or real reason. Once you advance yourslef to the next stage you can do that as you “feel” the market.
    So I guess I’ll have to leave my stop in a logical place and do my best to enter as much close as possible to the level to reduce risk…

  4. Micheal,

    Firtstly thank you for another great and honest post. I had to laugh when I read this:

    “You don’t want to be in this trade” “This is terrible” “You should be short” “You’re going to lose your ass on this one buddy” “See it’s coming back, get out quick!”

    I was thinking, how the ** did he get into my head and is thinking my thoughts? (Atlhough, mine would be in German, lol). Seriously though, I know those feelings of having a great idea, getting in and then scratching a perfect trade because one starts to see ghosts, or thinks how the expected (feared?) loss will impact the daily P/L. I wish I could say I have an easy soulution for this, but I haven’t. I believe that, like so many things in trading, the solution is in the process itself, as we must reprogram our brain though repetition and conditioning. This takes time, and is often includes fallbacks. The first step however is recognising the issue and isolating it so that it can be dealt with. This you did and therefore you are on your way to solving it. For me, for example, this problem is directly correlated with trading size (which is probably true for most). You want me to trade like a market wizard? Just make sure I am trading small, lol! The problems start when I increase size. What is my solution? Reduce it again until I am back on track and try again! And again. And again. Just like a beginnig guitarrist (I used to teach) will have to go through a period of pain in his or her fingers before they get used to the pressure of the strings, I think one needs to slowly increase pressure on one’s psyche to develop a similar resiliency. The key word here is *slowly* or one is likely to cause trauma or shocks though pain associated with losses which will negatively interfere with future attempts by trigerring pain avoidance mechanisms even more quickly. But, just as playing guitar means that you will use your fingers in an “non-natural” manner, and can be learned, I am sure that we can learn to deal with the individual fear related issues if we address them correctly. It’s not easy but hey, we would not be trading if we were going for the easy exit!

    By the way, I have Steenbarger’s “Daily Trading Coach”, and can recommend it!


  5. Great post Michael and great comment Benkotrader.

  6. VERY good comment Benko.

    We do really need to re-program our mind, it’s amazing how much of your character is reflected in trading, I couldn’t believe it once I’ve started noticing it.
    I am quite at the beginning and must say it is tough (and frustrating), sitting ALL day in-front of the machine (trade both globex and rth) and all I can do is 1-2 trades that I scratch quickly…
    I think that in my case the “pain avoidance mechanisms” kicked in very quickly (and I didn’t lose lot of money, only few hundred).

    I think the main issue (for me at least), is that I never really saw someone trading live, how he enters, how he handles the “heat” etc. Everything we do in life is something we SAW others doing, we first learned by watching and then thru experience. Here we need to learn right from experience.
    As if you need to jump into the pool to learn how to swim but you never actually saw someone swimming successfully before… would you jump?? In trading we have to…

  7. Great comment Benko, I will email you a guitar question.

    ValYouW – Not having a mentor is a huge problem in trading. Especially when we can’t see them trade live and that there are so many imposters out there (both paid & free). It’s a real handicap. FT, FlowTraderES, and Rob are helping to fill that gap a little but it’s not the same as being next to someone.

    When I get this down to where I’m trading well consistently, I’d love to do some live trading. That would be a lot of fun. But first things first, I need to improve my trading. If everyone saw me trade live they’d probably laugh their butts off.

    I also think if a small group of us were together, we could trade better. For example I enter long and then my monkey says to get out and you say “no stay in, it’s not even close to your stop” etc. The hard part is organizing such a thing. And to do it I think everyone would have to trade in a similar way or else it could be chaos. Then it starts sounding like a trading room, but the problem is very few people have the time or envy to make a huge commitment to running a room every day. So back to square one. It’s hard to get something together.

    A small prop shop in a big city might be another possibility.

    One thing is cool though, I’m not alone. I’ve met a few other traders who are beginning to be profitable and that’s encouraging because it boosts everyone’s confidence that we’re all making it.

    Benko – I’m debating on something. if stop can be 2 pts trade 2 contracts and if stop is 4 pts then trade only one. Still thinking about this..

  8. Yes, I agree Michael and ValYouW – not having seen anyone trade live, other than a few selected videos on youtube (mostly carfully chosen after the fact) is a real problem. I always say, trading is about *believing* – believing in your method, your edge, your ability to deal with setbacks, believing that you will achieve long term consistency, and most generally – believing that it can be done at all! It’s very very hard to get to this level of believing, particularly when you are faced daily struggles, losses, demons, and monkeys. A mentor would be very helpful in this regard. Rob and FT are the next best thing, but in the end, we must deal with these issues on our own. This is why I really appreciate your posts Michael, as you are addressing this important part of trading. Oh, and don’t worry – if you saw some trades I took, you would probably also be having a good laugh!

    The other thing regarding stop losses and size is a tricky one. Generally, I believe that markets are fractal in nature, and risk/reward calculations can be applied to virtually any fractal (whether it makes sense is a different question). So, yes, I would tend to agree that 2 contracts on a 2 point stop = 1 contract with 4 point stop as far as risk is concerned. The key thought here is that the stop price is dictated by the market (though structure and volatility). I am still experimenting with this myself and the more I do the more I think that this is the most challenging aspect of trading, and probably the most crucial to reaching profitability.


  9. Hello Michael,
    I also want to thank you for the info you are sharing on your site. It did provide me a lot inspiration. I did change my trading approach more towards order flow analysis and I feel this style really fits me (even though I am still just paper trading).
    As I am still learning, I like to read information from others that have similar trading approach. I know FT71, but I do not know Rob you have mentioned in your post. Is he on twitter? What is his nick?
    Thank you,

  10. Deqelan – I accidently replied via email, so here it is for everyone else:

    On twitter he’s @RobSpainTrading he also has a blog. He’s a very good trader, but way too advanced for me so I do not follow him too closely. He trades a lot of counter-trend which is not my style. So I check his tweets when I’m not trading to see what he has said and learn new things, but while trading I prefer to minimum distractions/influences.

    FlowTraderES is a really good trader too and his approach is closer to mine, or should I say mine is becoming closer to his (I have learned so much from him).

    Thanks for the compliments, I’m glad you enjoy the blog. I try to do the blog I wish I had when I was starting out. I want to show it can be done and talk about the challenges along the way. I thought when I was profitable then everything was set. But whole new challenges seem to appear. 🙂

 Leave a Reply

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>