Wednesday, June 19, 2013

Dont do this to yourself

There are various aspects to following a trading system. It hasnt been long since I've been following one, but let me note a few of the challenges one faces:

  1. Directional bias 
  2. Entries and exits / waiting for fills
  3. Taking every setup/trade
  4. Handling losing days
  5. Execution errors/mistakes
The first one is obvious. If you have a directional bias, you cant be effectively trade a system. Infact, the more you shut yourself out from having opinions, reading other "expert" opinions, etc, the easier it is to execute the trades.

The second one, is something I've written about recently. Being patient in waiting for a fill, either to get into a trade, or while getting out is something that comes over time. A few times, the target is hit, but you dont get a fill and then the price may reverse. This has happened to me three times this week, and has definitely tested my patience. But one should just acknowledge that its part of trading. Obviously the worst thing you could do is to let it turn into a loser, so I currently protect the trade with a 1 tick profit stop once the trade is hit. 

The third one, "Taking every trade" is probably the most important among the above and it is something I struggled with today. Today being FOMC day, one can obviously expect a shit show when the FOMC statement is released. The closing 5 min bar before the FOMC statement being released was a short trigger for me in bonds. I was nervous, and did not take the trade. Bonds then happily broke down about 45 ticks to end the day near the lows. Needless to say, I was pretty upset. 
I was upset for 2 reasons - I took every trade all morning, got chopped up and lost money. And when the winning trade came, I sat out of it. What the hell!? I've listened to multiple interviews with systematic trend trades and they all emphasize this fact, that you have to take every trade your system puts out. Win, lose or draw. You have to be in it, to win it. Lesson learnt, and I shall move on and strive to not repeat this experience.

The fourth one, handling losing days is also something I've written about before. No system is going to make you win 100% of the time, there will be losing trades and losing days. Accept it. Once you understand and acknowledge that a system has positive expectancy, and in the long run makes a lot more money than it loses - then this should not affect you too much. Its definitely annoying to have losing days, but if you took all the trades, followed the proper process, then you are good. 

The last one, is execution errors. You have to understand the signals properly. This is key, because sometimes, if you're not paying attention, its easy to get out of a trade early, or reverse position. Price moves fast, so correcting this error can be expensive. Last week, I blew a $1000 just trying to reverse a 5 contract trade back and forth. Ridiculous. One cannot make such mistakes. 

Anyway, I've been focusing on all these aspects over the last few weeks, and I feel I've got a handle on most of it. There's always room to get better at everything obviously. Unfortunately, almost all the above lessons, I've learnt the hard way by being in a trade and screwing up, so here's to hoping that I dont repeat the above mistakes. Hope everyone had a great day.

To end this post, since today is an FOMC day, etc here's a really nice quote from Jon Boorman:

"News is noise. Trade trends, listen to price. Tomorrow’s just another day. The market will still be there the next day, and the day after that. Just make sure you’re trading a strategy that ensures you and your money are too."

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