A Lesson In Sticking With The Plan
Saturday, September 5th, 2009
If you were following me on Twitter yesterday (Friday) then you’d know that I had what was starting out to be an excellent day of trading turned out instead into a lesson of what breaking one’s rules can do.
Here is what happened…
- I was already down a little for the week as of yesterday
- I held a couple of trades from yesterday into the morning comfortable with the risk represented by this month’s NFP report due at 8:30 AM
- 7 AM – When I first checked-in on my positions I was in the money with both positions (before NFP data release) – floating at roughly break even for the week
- 8:30 through 8:45 AM – An extreme price swing first down then up in my positions’ favor took place
- At this point, I had a $1,000+ price swing up
- 8:45 through 9:15 AM – The market sold off from its highs back to or slightly below pre-NFP release levels
- Despite the market’s strong swing back in my face, my trading rules were telling me to stay in but I didn’t (big mistake)
- My rules define certain price levels that must be broken to the downside to justify getting out of these positions; these levels were fine and no where near being touched
- Instead, I started to second guess my levels/approach and felt that it was time to get out because of how strong the down-move looked
- I didn’t want to part with all my gains from earlier and plus I thought I was outsmarting the market by ignoring my rules (what was I thinking)
- By 9:30 AM I had closed out my positions for small gains – the market trades lower and I decide it must be time to short so I shorted
- 10 AM – the market begins to rally and recover back above pre-NFP levels; I cover my shorts for small losses
- I watched in disgust as the market for the positions I originally had (but down own anymore) rallied hard and eventually touched my upside targets
- The targets represented a $2,500+ profit area for me – had I not foolishly gotten rid of them on a whim (ie. breaking my rules) earlier in the morning
- Now all I was left with was a sick feeling in my stomach and back to playing catch up next week
Not all is lost – there were a few good points that came of this:
- This day reaffirmed how effective my trading approach is – I shouldn’t second-guess it
- I didn’t make the mistake worse by making more mistakes
- This mistake didn’t cost me much money – I’m well within position to overcome the loss
So although it was personally disappointing, I was able to realize what I did wrong after the fact so that I can adjust my game/mindset for the next time I’m tempted to break the rules. Plan the trade and trade the plan…don’t try to outsmart the market.
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i’m sure all traders have experience this kind of situation lol. i plan to put ur site on my blog. hope u dont mind
Hi you’re right, all traders experience this at one time or another. Even though I thought I had this type of mistake under control, I find that every now and then it comes up…just human emotion. I’ll try to be more emotionless next time around. =) Thanks for including my site on your blog! If you don’t mind I’d like to add your blog to my blogroll as well. Thanks again.
I think it is very hard to be void of emotion when $ is on the line. Since becoming a more profitable trader, how have you been able to disassociate yourself from the fluctuations and avoid repeating your previous experience in trying to outsmart the market ? what parameters do you use to for stop loss – support level or percentage of your trade?
Hey Kheang,
The emotions of greed, fear, euphoria and anger most experienced by beginning traders usually stems from a lack of confidence in one’s trading approach or lack of experience with riding out the normal highs and lows of the markets. One can better control their emotions once they understand the strengths/weaknesses of their trading approach and can accept that losses are inevitable. Also, by treating trading as a business you can further detach yourself emotionally from the fluctuations of the profit/loss. The thing is, being able to disassociate yourself from the fluctuations doesn’t come after being profitable. Being profitable comes after you are able to manage your emotions first…not the other way around. Now I’m not saying I’m perfect…I’m prone to making mistakes now and then but I try to keep the mistakes far and few between. But when they happen it’s a good kick in the pants reminder of what I shouldn’t be doing.
As for my trading approach – my stops are always based on the violation of what I’ve determined to be material price levels, so basically support / resistance. And generally, I don’t risk more than 2% to 3% of my trading capital on any single trade.
Thanks for the comment. I hope my reply helps. Cheers.