I'm also trying to be careful about backfitting and hindsight trading, subtly changing my rules to fit yesterday's trading opportunities. I fell victim to this on Friday, but at least it was a conscious decision as I was playing with approaches to risk to which there's no right answer except to do what fits your own personality and risk appetite, usually after having discovered by painful experience what sort of risk appetite you have.
I'll talk about this some more in a moment but first here's a quote from a legendary Australian olympian, Herb Elliot, which struck a chord with me even though I don't push my body or even my trading to extremes. "I never understood why sports people are not the most humble people in the world because in sport, which involves physical activity, what you are trying to do is to squeeze the last drop of physical power and performance out of yourself - without dying. And if you gonna do that the only way you can do it is confronting your weaknesses and you discover, when you really set the test for yourself, and you apply yourself against that test day after day after day, you discover that, the thing that is stopping you to be the winner isn't the competitor, it's yourself, it's your own weaknesses. And so you start to work on that, you are trying to build strength where there are weaknesses. So, in my view, top athletes should have a much more conscious view of their weaknesses than the normal population. And that should bring humility. So I don't really understand why some guys get a bit carried away with themselves when they do actually achieve what it is they set out to achieve."
Obviously what I take out of this is that I'm also challenged day after day by my own weaknesses and what I can do to turn them into strengths. When I started working on the trading floor I'd see some of the older option traders who'd made a fortune in the 87 crash and I couldn't work out why they were still there. When I started trading myself I realised it was because it was fun, it was a game and the money was just keeping the score. Then after a few years more it wasn't fun in the same way and yet it was more compelling than ever because I realised that I'm up against myself and what I thought I wanted or could do was not necessarily so clear. It's the same sort of dawning of consciousness that we're all going to experience one way or another but for some reason, perhaps the repetitiveness, maybe the cyclical nature of markets, this kind of navel gazing is pretty common to older traders. I read a book of interviews with people working on the NYSE trading floor (can't find it in my bookcase right now) and the author was amazed at what he found. He expected to be confronted with a bunch of Alpha male Masters of the Universe but instead he met the cautious, introspective types you might meet at a group therapy session.
I was about to cut to the chase and start a bit of a post mortem on Friday's trading but it would be more useful to focus on my particular weaknesses and see what I can do about them.
I suppose it's not always obvious what they are but a few spring to mind. Impetuousness mixed with wishful thinking would be one of the biggies. Either another aspect of this or its own problem is a tendency to not leave well enough alone and to need lots of action. It's definitely hard to separate the issues actually as they all seem to be aspects of my personality but being a confidence player is another, things can occasionally spiral out of control although of course I also have golden runs. Essentially, all these imply a mercurial side and I get plenty of advantages to go with the drawbacks; I'm quick to make connections or pick up ideas. What I need to do is to channel this energy in a more useful way. One way is to test out these ideas and have a clear idea which ones work and then let my methodical side take over. Another is to use that imagination to see what could happen but then wait till I have some compelling evidence before taking action.
Anyway, I'm starting to bore myself so I will cut to the chase now. Thursday's action in both of the stocks below brought into sharp focus something I was debating; the value of having a tight trailing stop in obviously trending stocks. If you cut a position and then re-enter, it costs money in commission, bid/offer spread, slippage and mostly there's a little loss on the difference between exit and re-entry points. On top of this it can be psychologically tiring to jump back in.
On Thursday, I got so jittery about wpl that when I re-entered at 3560 I quickly cut at 3550 without any chart signal then had to grit my teeth and pay up to 3572 after realising my mistake. My experience in sto was gentler, I cut at 1489 as the stock consolidated and re-entered the trade at 1493. The upshot was that I thought I'd experiment with having wider stops back to the initial breakout point.
On Friday both stocks continued to look strong and I had a good opportunity to buy each of them. The approach worked in sto but backfired badly in wpl where by the time it fell back to the breakout it was so obviously weak that I ended up missing my cut point badly in a fast market and then compounded the error when I bought back in despite the waters having become cloudy. I then missed the chance, although I noticed it, of a quick short into the close after the weakness was confirmed by a break of the pivot with support at 3600. Also, notice this comment......
1.51 Wpl is a bit of an experiment as it actually made a little topping out pattern that I might have shorted on another day. At the moment I would have been better off to have cut and reversed at 3640 odd but I'm trying to reduce turnover and also prioritise clearly trending stocks. I may end up losing a bit more on some of these by having wider stops but when they go well I expect to more than make up the difference.
So how can I stay in good positions for longer while not missing out on the sort of reversal trades which work so well on an intraday basis especially in running stocks? First of all I have to bear in mind that there's no answer that's going to be infallible. That caveat out of the way, I do have an approach which I think will capture a lot of opportunities and that is simply to continue to use a trailing stop but to use the low of the second bar back - in a long position - and the high of the second bar back in a short as my stop and indeed in some cases as my cut and reverse point. ie I give my trades slightly more room when they're going well but don't miss the juicy reversals.
So on Friday in wpl my stop would have been 3641 rather than 3646 and that would also have been the point to try and go from long to short. If the second bar back is too far away then I need to use some sort of rule of thumb like trying to retain 50% of unrealised profits.
In practice, I tend to follow Joe Ross's approach which is to take off a proportion of a trade fairly early when it's in profit to cover costs and to give myself confidence and then I might take off another portion if there's a sharp spike, perhaps using a trailing stop based on a 5 or 10 minute chart. I find this works well and the way Ross trades, it allows you to pyramid quite successfully and to trade larger size. I'm rarely adding on to an existing position partly because I'm trading in 6 or 7 stocks but also because liquidity, slippage and time available acts as a constraint.
I believe that rules of thumb are more appropriate for traders and yet, personally, I go better if I follow strict protocols as long as I've really learnt to trust them. For example, my stop running meant that I was confused about rio on Friday which was a trade where really I should have accepted that my entry was late, the stock was still in its range and the stop should have been extremely tight. I intend to keep my stops tight when I take the lower quality signals and to clearly differentiate between the A and B class trades. I also hope to avoid talking myself into downright stupid trades!
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