11.30 hrs, Monday Dec 17.
It’s been a terrible day in trading for me. One mis-judgement has cost me 33% of my account!
I closed 80% of my JPY trades this morning at nearly the highs of the day. It cost me -196 pips in EURJPY and 79 pips in USDJPY for a total dollar loss of $108,480. My account is now down 40.5% for the month, almost half, at $232,380. And as I write this USDJPY is hovering near 83.55, just -5 pips from my short entry and EURJPY has been down to 108.96, almost at the closing levels of Friday. It almost feels as if the market is mocking me.
I am a veteran of many battles in the markets, and carry the scars to prove it. And I’ve learnt some things along the way. Firstly, markets are completely impersonal, unemotional. Some, or rather most brokers are outright thieves and I am not unemotional about that behaviour. However, I’ll focus on what I need to do, how I might avoid such big losses in the future. The best way to be in the market is be like the market, impersonal, unemotional. I made a mis-judgement and often this is the consequence of such an error. I accept it, learn (or in my case re-learn) the lesson and move on.
I misjudged the risk of the Japanese election outcome on the markets, and had relatively large positions open over the weekend with this major event risk. In hindsight – always perfect vision – I should have not left the positions open. The late surge in NY trade was a warning that the market will open gap high on Monday. I missed that surge as I was in zzz-land at 6 am in Australia, having been awake all night. I need to factor this into my trade plans in the future.
As a result of this incident, I am changing the way I allocate order size. The formula I use is a little more involved than simply order size inversely proportional to risk. I weight them according to how successful recent trades in that pair have been. I’ve been testing that method for the past couple of months and have decided to use this occasion to start applying it. In practice what it means is that my order size for most trades will now reduce to approx 5% of the account equity at that time.
On a somewhat philosophical note, I often reflect on the life of a trader. I believe trading is the most difficult vocation one can choose, and the individual trader is like a lone samurai fighting an entire army. The odds against the individual being consistently successful over a long term are impossibly high. In any other profession, one success compensates for many mistakes. But in trading, one mistake can destroy all of one’s prior success. So the trader needs an almost inhuman level of vigilance and concentration, or be exceptionally lucky, to avoid making one mistake that can wipe him out. Because of this feature of trading, it follows that the only way to be successful in trading is to have strict rules for action in each situation. One has to eliminate emotion, gut-feel, discretion. Figure out what works and apply it rigorously. Become like the market, an unthinking impersonal machine following rules of action-reaction, cause-effect; IF This Happens – Then do This.
Below is the updated account equity worksheet. The account is down 40.5% for the month, but still up 232% for the 6 months from June 2012. Not many other investors would have seen such a result over 6 months.
I am down, but not out. I will recover from this soon enough.