This is the trade that I mentioned earlier that made me feel like a gambler and a loser. I noticed that the SPX was trading in a tight range just before Friday’s non-farm payrolls report. I reasoned that a good report would bring an upside breakout from this range, and a bad report would bring a downside breakout. I therefore put orders to enter positions just above, and just below, the trading range, as shown on the following chart (from IG Index).

The sharp-eyed will notice that I placed the upper limit inside the recent trading range, out of greed. This was my first mistake. Shortly before the announcement, the market traded up — perhaps because professional traders expected a poor report, and wanted to take out a few people like me in order to get a higher entry level.

The market ran up close to my entry level. At this stage I should have cancelled the buy order, but I froze with my finger on the trigger — and got filled. Moments later, the market gapped down on the disappointing report, losing me 50bps (stop was at 25bps). I was lucky not to lose any more. However, the gap ended just above my sell order, and it was then filled. So having lost 50bps, I quickly made back 25bps, as also shown above. Did I cut the position as I had intended, thereby taking the quick profit I had planned for and offsetting the loss? No. I sat and watched the price come back up and take out my stop, losing another 25bps.

The thing about this experience is that it contains so many classic trading mistakes:

  • Being greedy — if I had used a higher buy order, I would not have been filled.
  • Holding on to bad trades — in this case, holding on to an order, which could have been cut for no loss, as the market ran up before the data release. Once the maket started to move up, this trade became a gamble and I should have been out.
  • Trading to make back losses. I held my winning trade for too long because I wanted to make an impressive profit.
  • Not having a good trading plan. I had no clear idea of when I would take the quick buck I expected to make.
I am sure there are several more that I could mention.
Note that this is all about execution and trading psychology. The market behaved just as I expected, trading within the range before moving sharply once the report was released. I just turned a winning idea into a losing trade.
This experience prompted some thinking over the weekend:
  • My best trades so far have been the kind of trades that I had planned to do when I set out to trade: instances where I waited for a strong technical signal on the daily chart and a good entry point on the intra-day chart.
  • A trader will not respond in the right way to new price moves if he is not used to doing so; in fact, he will be just as emotional as anyone else. I am not used to making decisions in seconds — I usually have minutes to hours to think about them. This is another reason to stick to my style.
  • I have turned several winning ideas into losing trades, either by being stopped out before the trade went my way or by failing to take profits when I had them.
  • My risk control has been good. Despite all my novice mistakes, my performance is really not bad.
The most important point here is the one about taking profits. I know that it is important to catch major moves — that is how you really make money — but equally, most trades are not the beginning of major moves and you will die by a thousand cuts if you don’t make money on anything that moves by less than 10%. I have been very aware so far that I had no system for taking profits. Now I have formulated a profit-taking rule, as set out in the previous post:
As soon as you have made 2x initial risk on a trade, move the stop to the entry point to avoid a loss. At each multiple of risk thereafter, you have to move the stop closer (to a sensible technical level).

This has the advantages of allowing for unlimited upside if the trade does turn into a strong trend, making me reassess a trade often even if it is running strongly in my favour, and of incentivising me to place wider stops (if the stop is too tight, I will have to tighten the stop after a fairly small move, and therefore increase the chances of being stopped out before making a decent profit). It may be sensible to increase the number of multiples of risk for each tick up of the stop as a trade really starts to run — it would be silly to be forced to place a stop closer than a major technical level when a good trend was established. But even if I experiment with this, in the initial stages of a trade I plan to stick rigidly to the rule. I have already created a spreadsheet to monitor the next stop-moving level.

The flipside of being readier to get out of a trend is that I must also be ready to get back in. This is an art that I will have to practise.