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.