Friday, July 13, 2007

Reflection Time

I read a thread on EliteTrader today that had me thinking of what I've done to prepare myself in avoiding another blowup trading day.
I really haven't done much except that I've been trading smaller size and that I don't immediately start adding to a losing position the minute it goes against me. I have been giving my positions a little breathing room and averaging some of my small losing trades, but I still haven't been using my stops wisely. I had some major losses the last 2 months, and I need to avoid at all costs another blow up day, and in order to do that, I need to develop a more sound trading system.
My ideas on avoiding blowup trading days-
1.Set a max loss for the day (no more than what I average in a 2-3 trading days, maybe 1k)
2.Use audible alerts that sound off when extreme situations are occurring, ie. advancing to declining issues is 3:1, "LONG ONLY, if your short COVER YOU DUMB ASS"
3.Be apart of a trading chat room where you can talk with others, and they may be able to help you if you become a deer in the headlights.
4.Having a trading system that will not average into a trade past a certain point (ie. no more than 2pts, Why would you want to average into a LOSING trade past that point, YOU LOSER)
5.HAVE and KEEP a PLANNED OUT STOP ON EVERY TRADE, no more, "oh, it'll come back, I'll just add a little here and it'll go back down to my breakeven point"

Here is my trading blowup escape technique example-
Based on how I trade I will say I can add to the position only 3 times, meaning if the trade started out as a 1 lot, I will not add more than 3 contracts to this losing trade. Also, the trade has to have a stop on it placed before the entry is made, for this example lets say I'm trading ER2 with a 1.4pt stop placed away from the initial entry. If the trade goes 1pt against my initial entry I'm already feeling like I screwed up, and at this point my brain starts to think, "this can't be right? I'll add to the position and it'll go back!", but then the trade goes another 1pt against you and you are now flat from having your stop hit. If we didn't have a plan in place we would be saying to ourselves, "this is totally out of wack, I'm loading up here now big time, this has got to go back now!,,,,,,,,,,
We know what happens next,,,,Right?

What if scenarios-
What if there is a bombing or something bad happens and the stock market freaks out, did you have in your stops ahead of time?
This is the problem with US retail traders, we are not smart about trading, we may be good at certain times scalping short term moves, but we are for the most part never hedged in our positions the way a option traders would be with a calendar spread or a hedgefund would be with having bought VIX calls for protection.

So what? How about a strategy trading futures where you are long one contract like YM and short ER2. You know both trade similarly to each other, but sometimes during the year the big caps are better than the small/mid caps. So our strategy would be for the most part hedged by being long big caps and short small/midcaps because we see that year to date that big caps have outperformed the small/mid caps.
So we will add to our YM position on down days and add to our ER2 position on up days, and over time we would assume that we are making money by one index outperforming another.

You can use this strategy on stocks and ETF's too, and the possibilities and profits are more likely to be greater IMO. For example you could check out the leading and lagging ETF's for the last 3-6 months and choose to use this strategy by buying the bullish ETF on weakness and Selling the bearish ETF on strength. Checkout the WSJ on their gauge of money flow into and out of stocks for a determinant of what stocks/ETF's this would be a good idea on.

For example you may have an idea to short IYR on strength and buy SMH on weakness, because you are bearish on housing on bullish on tech.


Anonymous said...

Great reflection and I agree, wholeheartedly, except for #3. Trading rooms, based upon my experience, are more of a hinderance than a help. You would now have to filter out the "chatter" and noise of the newbies in addition to the mkt noise.

Ever met a really senior trader who's making bank and constantly participating in a trading room? It happens, but is much more rare than newbies who are looking for a "leg up" ... a reasonable quest, but THAT'S NOT YOU.

The more reasonable rooms with the more seasoned folks who post something that isn't enirely dribble .... are usually more in the "swing" time frames and you're down and dirty in the order book. I have not found many "real time" rooms to signifigantly contribute to my bottom line, but your research may uncover a gem. ;)

Adrian on 9:53 AM said...

"We know what happens next,,,,Right?"

Yeah, by averaging down you guarantee that your losers will have much bigger size than your winners. A lot of people have gotten very badly hurt that way.

Have you gone back to see what the net result of averaging down has been so far? Do your winners make up for your losers? What would have happened if you had kept your initial size instead?

I've done this in the past until I realized how badly it was hurting me. One of the unexpected side-effects was that, by not doubling down, my thinking became much clearer. When I grew my losing positions I lost all perspective and discipline which was hurting me but I didn't even know it.

Good luck.

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matte351 on 8:42 PM said...

Always take your stops and never add to losers. Rule #1.

Chrisnyork on 2:59 PM said...

I think your instincts about adding to your losers must be reflecting something that makes sense on a certain level. I don't trade futures any more lol, but it seems the best entries are near where certain other trades are getting stopped out. At some level maybe your brain is trying to show some trading system. I have decided that I can only trade what I really know, so when I do the same wrong thing repeatedly, I try to take a second look at that.

Dinosaur Trader on 7:23 PM said...

Agree with Tyro and Newequity... don't average down. It may work now and then but over the long haul you'll always have that "blow up".

Much better to average up when you're right!

I have been running into the same problem though... whenever I feel like I'm "fighting" the market I pause now and try to recollect myself. Also, having a max stop loss on the day would be a huge help probably.


HPT on 9:38 AM said...

"When I grew my losing positions I lost all perspective and discipline which was hurting me but I didn't even know it."

You are right Tyro,
This is what happens, we freeze up in disbelief, that's why a trading system needs to be in place to prevent the emotions from controlling irrational trading behavior.

Good feedback everyone, I agree tmk,
all the chat rooms I've done never helped, I think if I was talking with a group of traders live then this would be beneficial compared to instant messaging, because we would be able to hear the distress in each others voices when we are stuck in a bad position, and a good friend would say, "what the hell are you doing", Get the F$*% OUT!

Dave Johnson on 4:27 AM said...

I have been running my trading room that focuses on the equity futs for the past couple weeks. I'd love to have you in the room.
I think maybe some of my backtesting data could give you some added knowledge in the battle.

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