I meant to make this post before the previous one announcing the decision to stop the blog.
After a lot of reflection and analysis of February’s poor trades, if I had to point to the root cause of it, I’d say it was the refusal to take my losses on the yen pairs in late Jan / early Feb.
The old proverb is very very true: The first loss is the best loss.
Because I didn’t get out of those trades, my view of the market got progressively more distorted. One poor decision led to a string of poor decisions. As those trades slipped further into the red, fear crept into my decision-making leading to further poor trades.
The lesson, the rule that I will never break again:
Plan the trade and trade the plan.
The first loss is always the best loss.
When the market proves you wrong, accept it gracefully, don’t fight it.
Tuesday, 4 March.
I’ve decided to take an extended break from blogging. I may leave this blog as-is for a little while and may take it down later, but I’m hoping not to disappear completely. I might come back and update the blog after about a year. I am continuing my trading, just won’t blog about it as before.
Keeping the blog takes some focus away from trading, which is the main reason to stop blogging. The second reason is that when I do well, posting about it goes to my head, I get complacent and cocky; and when I do badly all the naysayers crawl out of the wood-work to say ‘This was waiting to happen, you will fail, I told you so!’. Both of these effects are detrimental to the mental balance which is vital to be successful in trading. The Zen in the blog’s name.
I do appreciate the positive, constructive comments, of which there are many (much more than the negative comments). I take all comments seriously and many have changed the way I trade, the way I manage myself or look upon the markets. Thank you to all friends of this blog. Check back in December this year or early next year – I may post on how I’ve done in the year.
I’ll be happy to respond to any emails sent to my blog contact address.
There is no denying the poor results for February. The account is down -65.4% in February, almost exactly wiping out all the gains from November to January. It’s up net +3.3% from the starting level of 21 October.
As you might expect, I’ve done a lot of soul-searching over the past couple of weeks. Ultimately, I have concluded that the best way to recover from this situation is to face it head-on, look deep into my trades and learn from the mistakes. It’s a bit like cutting into an injury that is still raw; but carrying the medical analogy further, surgery is best done as soon as possible, before the wound gets infected and scarred. By facing my weaknesses when they are fresh and fully exposed I have the best chance of overcoming them.
There is one school of opinion that believes humans don’t change, that one is born with a certain character which will not change throughout one’s life. The commentator who touched a nerve early in the month is one such person. He is sure I will blow up and destroy myself. I have some ‘friends’ who believe this, and I have to be careful to stay out of their circle of negativity.
I don’t agree with this thinking. Yes, certain deep-set mental patterns are hard to change, but it is not impossible. I look back upon my own life, in trading and in other areas of life, and I can see that I have changed some deep-set patterns. The biggest challenge is to become aware of the problem – most of us don’t get past that hurdle. Once the problem is known it is possible to find a solution.
To those who only note my destructive mental habits I would like to point to another view of the same picture. I have faults that hold me back, but I also have strengths that allow me to build back more than what I have previously lost. I have rebuilt my account multiple times in the past, each time better and higher than before. That is a great positive for me. On each successive attempt I build on my strength and reduce my weakness. One day, very soon, I will break out from this level of small accounts into a comfortable zone, and then will accelerate higher.
Looking back on the analysis of last month’s trades, the most important lessons I see are as follows:
1. Take the first loss, however large it may seem at the time. The first loss is always the best. Do not hedge. Although in theory my hedging approach might work, the theory does not take into account the insidious corrosion of good trading judgement that happens when one is carrying a large unrealised loss. Trading needs a clear, balanced mind and carrying a large loss, even if it is hedged, clouds the mind.
2. Never enter a trade without a careful analysis of the charts and all relevant information. Plan the trade carefully, and then trade the plan. For me, if I have planned the trade well it eliminates fear and gives me the confidence to stick to the plan.
2a – following from 2. Careful analysis before the trade will automatically eliminate complacency. It will also reduce over-trading.
3. Do not hesitate when my rules call for a trade – hesitation often results in a poor entry, leading to a loss instead of a small profit or B-E.
4. Never chase the market, never try to ‘recover’ something from the market, never try to correct a wrong trade with another trade. There will always be other opportunities. If I am making bad trades, just stop trading and clear the head.
If anyone is interested, I have found the ideas of Mark Douglas in his books ‘The Disciplined Trader’ and ‘Trading in the Zone’ to be most useful in analysing, understanding and changing the psychological patterns of one’s behaviour.
1. My current system clearly is not suitable for ranging markets. I have known this from the start, but markets had enough volatility in the past to make up for this weakness. Now that markets are tighter, less volatile, this has become a serious liability.
2. I have always known the power of Fibonacci levels, but to keep my system simple I previously relegated Fibos to secondary importance. I am now changing my rules to give higher weight to Fibo levels, and also incorporate price action at key levels in my trade criteria.
Fibo levels, chart patterns and price action are somewhat subjective. Unfortunately this means my system becomes more ‘discretionary’ and less automatic. To maintain a high level of ‘objectivity’ I am re-working my rules, using ideas from statistics and probability. I still need to do some work to articulate the new rules clearly, but I’ve got a good mental idea of it already. I will start applying this new system immediately.
It’s taken some time, but I’ve finally done a thorough analysis looking back at the very poor string of trades in February. I know this is hindsight, but I find I learn and improve a lot by going over my mistakes and seeing why I made them. It allows me to think of ways of avoiding those mistakes in future. Some solutions are relatively simple – like adopting a new method of analysis. The harder ones are the psychological lessons. I know I have a tendency to get complacent, to over-trade, to avoid taking a loss. How do I change these behavioural traits? The first step is in becoming aware of them, bringing them up from the unconscious to the conscious level, where it is possible, although not easy to change them. If they remained in the sub-conscious, there is no chance of changing these behaviour issues.
In a follow-up post I will write a bit more on the steps I am taking after identifying the lessons from this analysis of past month’s trades. Here below are the trades, grouped by pairs.
Price action is looking aggressively bearish. Also the bounce did not even reach the 38 Fibo of the overnight fall, so the outlook today is bearish.
Ok, with an improved mind-set I am entering this trade after careful analysis.
Long EURUSD ($8/pip) at 1.3670, SL around 1.3643.
The reasoning for this trade is simple:
A confluence of Fibo levels at 1.3680 (daily swing 38Fibo), 1.3660, 1.3645, 1.3625 (all Fibo levels from the 4hrly chart).
On the longer term weekly charts, EURUSD seems to be preparing a base to attack a very important level, viz. the big down-trend line from the GFC high of 1.60xx which also capped the 1.49xx high of May 2011 and the recent 1.3894 high in Dec 2013. It is currently around 1.3820. Above it is the 50% Fibo level of the big GFC drop which has not yet been recovered. The weekly chart strongly suggests that we will breach the trendline and hit this 50 Fibo level (at around 1.3950). Third time is usually lucky. If it doesn’t break through, look for an almighty retracement down to the low 1.3x over the following weeks. Combining with the event calendar I would expect the next ECB meeting to provide the fuel for this move.
26 Feb 2014
January was a fantastic month for me, up +78%. February has been a mirror image. A very bad month. Down about -60% so far. Lost everything made in January and some more. I’m still up around +20% from last October’s start, but that is little comfort.
Due to the travelling and disruptions in my day-to-day living I haven’t yet done the trade-by-trade analysis of the Feb trades. But some initial evaluation of recent trades points to the following problems:
1. Complacency. When I am trading properly, I have a good routine for living and trading. I spend a good amount of time studying all charts before taking a trade: Weekly, daily, 4hrly, correlated markets, event calendars, etc. Then I go through my checklist/rules and verify how the current setup fits with it. Doing this gives me the confidence needed to enter and hold through the ‘noise’ of the market. This month, this careful analysis was replaced by a cursory glance at the charts and I jumped in. There were many trades that I should have waited before entering, many that I should not have considered at all. There is no excuse for this. Impulsiveness is a fault in myself that I have known for many years, but by its very nature it is difficult to overcome. Having said the worst, the silver lining is that I am getting better at controlling this tendency. Each downturn in my trading due to this weakness is getting shallower – higher highs and higher lows!
The answer is to have a routine to go through before each trade and force myself to follow this routine. In other areas of life I have found that having a partner or being part of a team of people who restrain my impulsiveness produces good outcomes all around. Trading exposes this weakness due to its lonely nature. Hard to find a partner or a team and yet have your own unique style of trading.
I should follow the old traders’ maxim – walk away from the market after a big win or big loss. Until now I considered this light-hearted advice, but now I know it has depth of experience behind it. In future I will definitely take a long break from trading after a good run – take a holiday and spend some money, instead of losing it to the market again.
2. Pressure to perform. The results over the past 3-4 months, and especially January, raised my own internal expectations and internal pressure to achieve the same results. That distorts judgement and in combination with other factors led to bad trading.
3. Tight Ranging Markets. My system rules were developed based on research of the charts from 2001-2010, with more emphasis on the later period. This includes the GFC during which markets were very volatile and had big moves. Compared to those years the markets now are much less volatile and the moves are smaller. The ATR in most markets has dropped a lot since 2011. February has been a particularly tight month and my system performed poorly even if I had followed it strictly.
4. Wrong Tools. Because my system is designed to catch swings of 100-200 pips from range breakouts, my entries tend to be after a break has occurred and confirmed. This approach suffers badly when a small range simply morphs into a larger range, without decent sized moves. Wrong tool for this kind of market.
I am now researching a different approach to trading, one that relies on ‘levels’ more than on ‘breaks of levels’. Fibos, support, resistance will take priority. I need to incorporate this into a coherent strategy that covers entries, stops, exits and re-entries. I will also research some other methods of trading. One that has always attracted me is ‘Make 20/50 pips each day and stop’. That is a day-trade approach, but the mental aspect of it is attractive – treat trading as a daily job and don’t think about the job once you have finished work. The challenge is to make 20/50 pips consistently each day, or at least 100 pips on average each week. The flip side is that I really do not like watching charts of 1h or lower TF. The candles jumping up and down on the screen play on my mind and make objective decision-making harder. Also, there are many days (e.g. the past few days in Yen pairs) when the market does not even give you 20 pips cleanly! So there is quite a bit to research and think about.
One last observation. I am having serious doubts about the benefits of having a public blog. One trigger that could have disrupted my frame of mind early in February was some negative comments on this blog and my response to them. I don’t blame such comments for my failures, but controlling emotions and reading the markets clearly need tight mental discipline. When I am trying to keep my mind on an even keel external factors like such comments simply make it harder to keep the mind in balance. My success or failure matters only to me so perhaps I should remove the distraction of an audience.
I have not updated the blog with a few trades done this week. I am basically flat except for the UJ long exposure. On the L-T charts, UJ is definitely in a bull market. However we are in a consolidation right now and the daily charts point to a pretty high probability of a re-test of the 100 level. If 101.80 breaks to the downside I will enter a hedge, otherwise let this trade run.