First published 09/12/09

I was stopped out of my gold trade last night. The market fell though my stop at 1129. It closed above it at 1132.2, and is now trading at 1145.0.

The first question to ask is, did I do anything wrong? Trading losses are to be expected. In fact, one can still be a successful trader even if a majority of trades are closed out at a loss, provided that they are closed out for a small loss and the good trades make a decent profit. I do not think that this was an ordinary trading loss, however:

1. I did not pay sufficient heed to the signal given by the wide-ranging down day on Fri 4 Dec (a signal of further declines to come).

2. I did not think through the implications of the furore over Greek government debt: rising risk aversion and hence a jump in the US dollar and a decline in risk trades (I suspect that gold is being driven upwards by liquidity and speculation; with hindsight, I should have seen that this made it a risk trade).

3. I placed undue emphasis on the short-term support level; the support at 1136 was perhaps strong enough for a short-term trader, but for a longer-term trader looking for an entry point it was too weak to justify a stop so close to it at 1129.

4. I did not place enough emphasis on the resistance at 1160. The market had failed to sustain a break above it for three days. It would have been better to wait for an upside breakout from this level to confirm my thesis that the main uptrend was still in place. I should wait for the market to tell me that I am right.

5. The stop was too close. The market actually closed well above my stop, and the drop through it now looks like a temporary blip on the chart. Stops should be placed at a level where the market would be telling me that I was wrong. With hindsight, an intra-day break of 1129 doesn’t give that message. Why did I place it so close? Greed — a closer stop allows higher profit potential for a given loss-to-stop.

6. Did I give in to the desire to do something, sitting here starting at the trading screen? Perhaps. I may also have been influenced by frustration at not being able to get into gold when it broke 1000 (owing to restrictions at my previous job). I was aware of both of these possibilities at the time of placing the trade, but perhaps I should have been more cautious. I also relied too much on my analysis from the day before, when I failed to get into the trade — I saw the market fall yesterday as another chance at getting in, whereas I should have reassessed the trade properly. I hope to get a feel for this kind of issue as I get more experience.

7. I did not start the day with a plan to trade gold — I jumped in when I saw the price fall.

I lost 1% on this trade. I have reduced my theoretical maximum loss per trade to 0.5% until I have more confidence that I am not making stupid mistakes.
On the plus side, several good things come out of this trade:

1. It was a welcome early reminder of the dangers of trading. A successful first trade might have made me complacent.

2. I was pleased that I kept the loss to 1% of trading capital. I felt no temptation to move the stop even as I watched the market fall.

3. I was also pleased with my response to the loss. A successful trader has to be able to deal with losses. I am not happy to have lost money, but I am quite relaxed about it.

4. I have been reminded of the importance of having a trading plan. This morning I went through my markets at 7.30 and selected some that I might place trades on today. I then reassessed them. All this was based on yesterday’s data, with no seductive market shouting “I’m moving, you have to act fast”. Only when I had finished and formed some plans did I look at what the markets were doing today. Consequently, I feel much more in control today.

All this should chime with anyone whom I have told that trading will be a psychological game. It is one thing to know how you are going to go about trading; it is quite another to actually do it. If I fail at this venture, it will be because of my own psychology.