Friday, June 15, 2012

Traders Best Practices: Knowing Your Weakness’s or Why Do Fools Fall in Love?

Why are we as humans biased to look at the positive side of things? When we think of a basketball players shooting percentage, it really is his “making” percentage that we are measuring. If we say he is shooting 48%, it is because he is making 48% of his shots. A baseball player hitting .300 is getting hits 30% of the time. When we analyze our trades, we look at our win percentage as one of our metrics, 60% would be nice.
Why don’t we say he is missing 52% or making out 70% of the time or we are losing on 40% of our trades? It is a lot more enjoyable to track and measure our successes than our failures. It is natural to want to bring to light, even if it is our own internal light, what we can do as opposed to what we cannot. For instance, at the end of a trading day in which we’ve been right on 60% of our trades and made say $1500 which happens to be $500 over our goal per day as written in our business plan (You DO have a WRITTEN business plan, don’t you?), it can be very east to say, good day, pat yourself on the back, yell to the wife or call the girlfriend and say “Honey, let’s hit eat at il Mulino tonite (well maybe you should wait till you’re up $2500), I had a good day!
While looking at our success’s feels good, I would argue that it is more beneficial to analyze and critique the negative, to spend some time after the close to analyze the 40%, the losses. Why did I lose, what did I do wrong, if anything? Did I chase on that trade? Did I ignore my stops? Did I add to a loser? Did I let a profitable trade turn into a loser? Look, we all have our rules and we all break them sometimes. We lower our stop, we realize that there is another support area where we can add and lower our average entry price. We take a “revenge” trade and get hit both ways. If you are capable of never breaking a rule then more power to you…. Go right to the positive side of the ledger, no go right to the restaurant! But if you’re like most and haven’t written an algorithm then you probably break some rules now and then. Here is where the value of a trading journal comes in. Are you a creature of habit? Over time, does one rule seem to get broken more often than others?  If you’re like me then the answer is yes. I’ve managed to isolate and eradicate more than a few trading issues by journaling and honestly critiquing myself. Through this process more than a couple of issues have been noticed and corrected over the years.  And yet, for me, there still is one rule that seems to get broken every so often. And unfortunately it usually leads to breaking more rules. That’s another thing that I’ve noticed about my own trading, that when I break one rule, it almost always leads to other rule violations. I started this blog after another blogger mentioned how writing has helped his own trading, so toward that end I’ll spill my guts a bit.
Have you noticed anything about yourself? What’s your vice? Do you even know? Have you really given time to analyzing your trades? I have, and my vice, mine is LOVE! Yep love. I fall and I fall hard! But I’m also not monogamous when I’m really in the mood. Yes I’ve found that I can be in love with a few at a time, I be a real Don Juan. I can usually keep all these emotions in check but there are some days when all I need is for a trade to show me some love and I’m in. And if I’m getting some love from a few lovelies at once, well then I’m done, mush, forget about it, a fool for love. Yesterday was one of those for me. Here’s a synopsis.
I came in a long small in a few issues but with a nagging thought of possible weakness. I owned a few extra puts in AAPL & SPY so if a monster move down happened I’d be ok and I could buy another long or two since I had that protection.  I was prepared to go with any bullish move, and we got one, and I bought a few stocks, AAPL, SPY, then some GOOG calls, DNDN, CF, then UA & AMZN, & BIDU. The market internals looked pretty good and most of my positions were up good coin. I had scaled out some partials at nice profits in AAPL +2.5, +3.5, ½ of my SPY +.43, GOOG calls +.75 through + 1.25. CF was slightly up so I sold ½ for a small profit and the balance breakeven. And then Cupid hit me with her arrow. I guess I saw how I felt breaking up with CF and well, LOVE was sooo much better. I was in officially in love with my other positions. Hell I didn’t even know it at the time but I had become a bigamist and married all of them. So when the market crack hit in the middle of the afternoon, and prices started to fall, and guys like the Goat were starting to have their trailing stops hit, I subconsciously decided to remain loyal to my “girls”. In fact, so loyal that I cemented my commitment by having babies in GOOG & SPY (buying back my earlier sales), AMZN & BIDU (adding). I was head over heels in love. But apparently my wives & girlfriends happened to find out about each other and as you might expect, tempers flared (portfolio heat). And they all started acting out, all at once, throwing temper tantrums. I’ve been through trying to make a marriage work before and while divorce is painful, staying longer than you should can be a whole lot worse. So I decided “Screw you Bitches” I’m divorcing all of you right now. So I dumped them all, who needs them? They were only pretending to be keepers anyway. I called an old friend, Raul Felder (he handled my 1st divorce) but he was too busy with some celebrity, so I got one of those $99 divorces advertised on the buses & subway for each of them. Cost a bit but could’ve been a lot worse. I felt better for a while as I watched those stocks fall further, but then all my girls and their new significant others  went on fantastic vacations together when the central bank rumors hit. Me, I watched with my jaw dropped as the all took off, I grabbed a partner for a quickie but I definitely had a bad taste in my mouth when the day was over. I felt like a jilted lover, the losses hurt but the rally without me was worse…….
So how did I learn from this? First I spent some time last nite journaling my trades, going over them all, putting arrows on charts where I entered, where I scaled, where I added and where I exited. I gave thought as to why I broke my rules and wrote down my observations. I compared those thoughts to similar days where I broke rules. What were the similarities? In my case, I believe it was having too many positions that caused me to break my rules. In about 10 stocks, all of them green just released too many endorphins and I didn’t want to stop that feeling, didn’t want to let it go. So, new rules with strict limitations regarding not only # of positions but also net $ delta (the $ amount of the options equivalent share position) have been written down and added to my business plan. Live and learn! Knowing your weakness’s can help you avoid them in the future. Me? I know I’m a fool for love. Next!

PS If you want to watch a pro at not letting a profit turn into a loss, stop on by at for a free trial. The Goat is the best at locking in and keeping profits!

1 comment:

  1. Great post, Randy . refreshing to know even the pros go through this - Thanks for sharing your thoughts & have a great weekend .
    Hugh / @CoonCatt