Forgive me Father for I have sinned.
Confession in the Catholic faith helps people to face their failings, which is the first step to recovery.
I returned to the trading desk two weeks ago for the first time since 2007, when I made the decision to join the US Marine Corps in service to my country. In those four years, I experienced remarkable growth as a person, a leader, and as a manager, which will undoubtedly pay dividends in business.
Unfortunately, these past two weeks have not been demonstrative of the cumulative lessons learned both as a trader prior to serving and as an officer in the Marine Corps. I’ve been too eager to get in the market, to stay in the market, and too willing to accept unnecessary risk for uncertain gain. The result of my ill-planned and executed trades the past few weeks has led to today’s culminating loss of 3.5% in a single day. The purpose of this post is to acknowledge and address the flaws of the past two weeks.
“A trader can do only four things in a market: win big, win little, lose little, and lose big. Small gains and losses will offset, leaving winning and losing big. Eliminate ‘lose big’ and a trader can only win big.” – Anonymous
In years past, a 3.5% loss would fall into the “small loss” category that would otherwise be offset by a small gain. However, now that I’m a professionally licensed Commodity Trading Advisor (CTA), registered with the National Futures Association (NFA), a manager of futures and forex, my monthly target is a mere 1%. In fact, consistent gains of just 1% per month would qualify my asset management service for consideration by funds of funds money managers. Steady performance with a good chunk of change under management (otherwise referred to as AUM or assets under management), will make for a successful career as an independent trader.
“Bulls make money. Bears make money. Pigs get slaughtered.”
Emotions of fear and greed rule the market. If you let them rule you, you will suffer a trader’s death.
The picture below is what I saw two days ago on the Daily chart of the cable (GBP.USD). As you can see, this is a multi-month long cup and handle formation which portends a sharp break to the upside.
Entry Time: 20121203 22:37 EST
Formation: Handle breakout
Time Frame: Daily
Profit Target: 1.6300
Stop Loss: 1.6051, 48 pips, below lowest daily pivot point and daily moving averages
Exit Time: 20121206 12:22 EST
Take Profit: 1.6051, stopped at 48 pip loss
Percent Gain: -1.92%
But this is what happened…
You might notice two things. First, I held the position for multiple days even though I was bothered by what appeared to be a reversal candle on the daily chart. Most reversal candles appear at the top or bottom of a trend, with the final candle coming after at least three candles in the same direction. This candle formed after a single daily move up. Hence, I was concerned that I entered the trade at precisely the time when I should be going the other direction, but was frozen by both fear and greed. I counted five waves and a reversal candle on the daily. Even the 4hr chart showed an ominous drop in the near future. Rather than cutting my losses, I held and lowered the stop loss to an unreasonable level. Worse, I had numerous opportunities to get out at a profit and yet every time, greed won over and I held for greater gains. I went long on a breakout on a wave 5. That’s a big no-no.
My chance for getting out at a profit on that position passed over night. Had I set a take profit, I would have locked in gains of 20+ pips for nearly 1%. Today, I saw the pair trending down towards the daily moving average, but thought it could bounce back up. When it became clear that the pair had reversed, as I had feared could be in the cards, and wasn’t going to bounce, I entered into a bold, risky game. I doubled down on the bottom of a wave 5 on the 2 and 5 minute charts hoping that the pair would reverse just enough that I could get out at a small loss or break even. It worked. But instead of getting out, again I succumbed to greed and held. The pair eventually reversed minutes later, broke support and turned into a huge loss for a total of -3.5%.
The best and worst part about this trade is that it was wholly preventable. I recognized the pitfalls: a wave 5 reversal candle, a drill-down chart (4hr) portending an upcoming reversal, and yet I failed to act in both cases because I did not set a take profit prior to entering the trade. This last point, is critical because doing so enables you to plan using logic rather than reacting to emotions of fear and greed.
Lesson: Start with the end in mind. Know your exit strategy before you trade, then build it into the trade.
In 2007, before I started posting to this blog, my performance was lackluster at best. Publishing my performance for your review ingrained accountability into my psyche and forced better trade planning and reduced risk.
The Forex market can be challenging for many reasons, but especially because of the double edged sword of leverage, which is part of what attracted me to the market. By becoming NFA-registered and by passing my Series 3 & 34 examinations, I’ve committed to success. However, success requires discipline and discipline requires a plan.
Trading Plan (DRAFT)
- Mission: Remove emotion from the conduct of trading in order to produce gains of 1% or better per month.
- Components: Trend evaluation on Daily, 4hr, 1hr, 15 & 5 minute charts. PMLCOA (Pair’s Most Likely Course of Action), a summary of expected price action, will drive the entry and exit orders.