A Good Imagination and a Pile of Junk

7 consecutive up days at the market.

Yesterday I had an inSANE day. Not an insanely GREAT day mind you. I was up… err… a lot in cash and I made a trade based on a newsletter recommendation (a very good newsletter with a rather remarkable success ratio lately) and the market turned around and that one trade looked to erase more than my gains for the day.

An email alert for the newsletter came out saying “dump it at a loss, this market’s just not letting up.” But by the time I got the email it had already improved a little from that point. So I put a protective order on so that if it got worse it would automatically go, then I struggled to endure massive fluctuations.

That trade ended to the bad, erasing more than half of my gains. But I was able to save a bunch by judicious panic stricken manipulation of my exit point. So THAT I’m pretty chuffed about.

Then today I had a small trade that I called beautifully. It wasn’t a huge gain, but it was quite healthy. My entry point was well reasoned (a relatively new notion in my trading :p) and while my exit was a little frenetic, it obeyed my trading rules which makes it a success. The fact that the issue (Wells Fargo) went the other way as soon as I exited the position had me doing the happy dance for about an hour, feeling very good about myself :)

Ya know, the “most important thing” about trading changes for me every 20 to 30 seconds, as you might imagine. But there are only three things you need to get good at in order to be able to do this successfully:

1. Develop a trade plan: What are you buying and when. Under what conditions are you exiting the trade (to the good and if you’re wrong.)
2. Trade that plan. This is so very very much harder than it sounds. No, there’s not a gun to my head with Halle Berry blowing me but there are a number of things that make it pretty damn tough to concentrate.
3. Change your rules when necessary. “When necessary” is easily defined if you’ve obeyed the first two. It’s when you’ve obeyed the first two, the trade breaks, and there’s a reasonable adjustment that would have prevented it that is reasonable to have seen up front. Look, the WFC trade I mentioned from this morning turned “against me” after I sold…for a little while, then it turned back around and went 3x farther in the direction I had on. But my trade was intended to be a 3-5, maybe 10 minute trade. I wasn’t looking to catch the hour long trend. Maybe I should have. But that’s a different evaluation. I couldn’t reasonably have seen that happening on the time frame I trade. That trade is a different thing altogether. So this was a success.

I have a couple additional rules that keep me as close to sane as I’m likely to get:

Never make the same trade twice in a row.

A successful or failed trade slams me emotionally. I used to succumb to this hideous impulse to either run back and do it again or “get my money back.”  Neither of which are particularly constructive impulses.  My rule forces me to shut down the chart for a ticker that I’ve just traded.  It forces me to step back treat every trade as an individual thing.  This was an incredibly expensive lession.

Decide up front how much draw down you’re going to accept:

This would be nice if I could follow it better than I do.  Let’s say you buy a bunch of FOOBAR at $100 having a well thought out thesis that it’s going to go to $110.  You buy and it hits $99.  RED BAR RED BAR.  You start sweating.  $98… oh crap… maybe I botched this one up… $95.. uhm…uhm… SELL!  Phew, that could’ve been bad…. $98..$99…$100…$102…$106… SHIT SHIT SHIT SHIT SHIT!

I can’t count the number of times I’ve stomped around my apartment screaming on the phone to my endlessly tolerant friend, “BUT I WAS RIGHT!”  As if the market gave a crap.

Things correct, the price moves breathe.  Nothing goes up or down without stopping to ask directions and frequently retracing it’s steps.  Make sure you’re wrong before you decide you’re wrong.  Decide up front how much you’re going to endure.  You can place orders up that will automatically dump the position if it goes too far.  That way you remove emotion from the trigger.  If you were wrong about how much to endure at least you TRADED THE PLAN, and you an adjust your rules and have a better plan next time.  That’s VITAL.

There was more but I’d only intended to have a “woohoo I’m doing good!” post, not an expository blather about trading technique.  Maybe I’ll come back to it.

*shrug*

ooh, shiney!

Tags: trading

This entry was posted on Friday, January 16th, 2009 at 3:43 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.