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Saturday, July 18, 2009

Disgruntled Trading -Trading Plans

Disgruntled Trading -Trading Plans

The following situation happens quite often to many traders. Look it over and see if it has been happening to you:

You have been faithfully following your trading plan and the rules you’ve set for trading. By following them you are now in a trade that doesn’t look so good. At the same time, by following your trading plan, you see that you’ve missed a beautiful move in a different market, one that could have made you a lot of money.

You are in a bad trade and you’ve missed out on a great trade. You become disgruntled. You think to yourself that your trading plan must not be so great. You think there must be a better methodology that you should use that will prevent this from happening. You think to yourself, "Yes! That’s it, I’ll change the way I do things." So you create a new rule or modify an old one so that such a rule would have let you capture the trade you missed and avoid the one you took. Have you been making this mistake?

Here’s another way it can happen: You are in a trade, and your rules cause you to be stopped out with little or no profit. Shortly after you exit the trade according to plan, prices take off and move to where, had you stayed in, you would have made substantial profits. The move leaves you sitting there thinking you are stupid. You reason that there must be something wrong with the way you do things.

Your rules, your plan, or both must not be right. So you change what you are doing, or make a new rule so that the next time this happens, you won’t be left behind.

You have just abandoned all of the hard work you’ve previously done that enabled you to successfully trade futures. You’ve abandoned your education and learning. You’ve abandoned the wisdom that will enable you to be consistently successful as a trader. You’ve just started trading history, and you are supposed to be trading on the future movement of prices. You are trading what happened, not what will happen. By not being willing to be left behind, you are setting yourself up for being left out.

If you’ve been having thoughts, or have been acting as we’ve just described, you have a terrible problem with greed. Why? Because greed can never get enough. You can’t satisfy greed. Greed wants more, and yet more.

Not every trade is your trade. Not every trade has to work out for you. You have to be satisfied with getting a reasonable share of trades that fit your description of a good trade. Some of those trades will turn out to be great trades, others are good trades, and a certain percentage of your trades will be bad. There’s no way around it.

Not every good trade will turn into a great trade. When you enter a trade according to your rules and trading plan, you have no idea whether or not it will turn out to be a good trade, much less a great trade. The reality of trading is that, try as you might, you cannot know the future.

Whenever we miss a big move and then try to find some pattern, indicator, rationale, or modification to make to what we are doing so that the next time we will not miss the "big" move, it is a part of the hunt for something magic ¾ a continuation of our quest for the holy grail of trading.

What a terrible mistake to allow yourself to make. Winning as a trader consists of making some small profits and some larger profits on a regular basis. Obviously, there will be some losses. We regularly want to keep losses small, but there are times when a loss will get away from us and turn out to be bigger than desired.

If adversity causes you to become disgruntled, then you really need to examine your thinking and your approach to trading. Your trading plan must allow for disappointment and loss.

You’ve got to believe in what you are doing and be able to trade from the knowledge that when you follow your rules and your plan, you will make money from your trading.
When you become disgruntled and begin to change your plan, your rules, or both, you are setting yourself up for almost certain failure and the worst thing that can happen to a trader ¾ you will lose the courage of your convictions. Without it you cannot trade with any level of confidence.

This is why we encourage you to write out the reasons and rationale for every trade you make, even if you have to do it after you have completed the trade. You must develop a keen recognition of the trades that are your trades. Write out your trading plan every day and for every trade you intend to make. If you did not have time to plan every trade, be sure to review those you did make without pre-planning. Then you can go back over your trading and be able to see why and when you are successful.

Reminder: Here are some steps to take before the market opens.

· View major formations on the charts of those futures you intend to trade. View potential congestion areas, get the big picture from the longer term charts.

· Write down all potential entries as you see them on the chart.

You need to go through this exercise every day that you trade. This takes discipline. However, doing so will help you develop the kinds of habits that will mold you into a great trader.

If you are too busy to be disciplined, then you are too busy to trade. If you don’t discipline yourself, you will soon disappear from the trading scene.

Discretionary Traders - Don’t Talk About Your Open Positions

In browsing around the web I often encounter discussions of the merits of a particular trade and opinions about the direction of a market. I know that the traders who voice these opinions have good intentions and much of the discussions could be helpful to the person receiving the information. (Some of these discussions are on our Forum.) However the provider of the opinion must be very careful that he doesn’t start believing too strongly in his position because he has made the mistake of going public with it.

This is an important psychological issue that I seldom see discussed. Taking losses is always difficult and the reluctance to promptly acknowledge that we are on the wrong side of the market is probably the single most costly error a trader can make. Even under the best of conditions we hate to take losses. Publicly advocating a particular trade or the direction of a market just makes being wrong all the more painful and harder to accept. If we make it a policy to go around advocating the merits of our trades it will only make it harder to recognize when we are wrong.

Many years ago when I was a young futures broker at E. F. Hutton and Company, the firm decided that it would be a good idea to send our commodity research analysts on the road whenever they came up with a well researched idea that appeared to have great potential. Let’s assume for a minute that our sugar analyst has decided that sugar is going to make a big move to the upside over the next six months. After publishing his research he would be sent from city to city where he would speak at meetings for brokers and clients suggesting why everyone should be buying sugar. At first the analyst road shows seemed like a great idea. The clients received the benefit of hearing about a well-researched idea straight from the analyst himself and also had the opportunity to ask questions and engage the analyst in a discussion of the details of the sugar market. The clients enjoyed the meetings and a lot of new commodity business was generated as a result.

However, it turns out that the objectivity of the analysts was completely lost after the story had been told and the bullish scenario presented a dozen times or more. The analyst felt obligated to the firm and to the clients. The firm had spent a lot of money to send the analyst on the road and to host these meeting all over the country. As a result of the meetings the clients now knew the analysts by name and his personal and professional reputation was clearly on the line. This analyst was now committed and he was going to be bullish on sugar regardless of what happened in the market or what new information came to light. From the point of the tours onward the analyst would only look for information to support his opinion. To ever admit that he was wrong would be such public humiliation that the analyst would tend to ignore any contrary information and would stick to his original position through thick and thin. We eventually learned that the talented Hutton research analysts did a much better job when they were free to change their minds as new facts were revealed without the pressure and responsibility generated by their repeated espousing of a particular position on a specific trade.

Discretionary traders should learn from this example and avoid discussing their open positions or their opinion about the direction of a market. It will only distort their objectivity and make it harder to take a loss promptly when that is the best course of action. Losses that only we know about are tough enough but losses that everyone knows about become much harder to stomach and we tend to postpone our exits in hope that the market will eventually turn around and prove us right. Remember that the best discretionary traders are usually very neutral about their positions and tend to take their guidance from the price action and the flow of new information. Its OK to listen to others talk about their positions but don’t make it a habit of discussing your open trades. It will only cost you money, especially if you repeat your opinions often enough that you might actually start believing what you are saying.

Fortunately, systematic traders seldom get married to a position. They enjoy the luxury of being able to blame the system if a trade doesn’t work out. Since there is little personal attachment to any trade, the psychological problems of systematic trader are much different than those of discretionary traders. But even systematic traders have their share of psychological problems. Perhaps we can discuss some of these problems in a future Bulletin.

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