MichaelD
Not fooled by randomness
- Joined
- 7 December 2005
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I would like to share with you one of the most egregious trading errors I have made in a long time. It is my belief that we learn little from our big wins on the market, but learn much from our errors. It is in this spirit that I present the tale of WMT, Western Metals, a speculative mining company. If you can view the chart as I walk through this, it will help make more sense of things.
A quick note - the system discussed has been designed to behave in a particular manner and has to date in all market conditions it has been tested and traded in demonstrated a very satisfactory positive expectancy with a very smooth equity curve.
Day 0 - The Initial Trading Signal 5-Mar-2007
One of the systems I trade is a short term system which uses a breakout as its entry signal. WMT signalled an entry on the 5th March 2007 when it closed at 0.20 on increased volume. This was during the depths of the recent correction, so there were very few bullish signals around at the time, and I was in the process of closing the 3rd loss in a row.
This system utilizes a profit target, so my entry conditions/stop loss were;
Close 0.20
Stop 0.18
Target 0.22
Position size 0.25% risk
Day 1 - The Initial Entry 6-Mar-2007
This system calls for an entry on Open the next day, so on 6th March 2007 we lined up at the entry. Unusually large volumes on both the buy and sell side were noted, and the IOpen kept going further and further up. My wife executes our trading signals - the idea is to decrease the risk of trading errors due to emotional factors on my part. I happened to be home before the open, so she called me to the trading screen - the Open was at 0.225, beyond our target price.
This circumstance had arisen once before during system paper trading, and after analyzing that trade we had written into our plan that in such circumstances we would enter the trade on the Open and not enter a sell target, managing the trade merely with an end-of-day trailing stop.
We entered the position at 0.225. We were both excited at this point, and I said "let's day trade this one - trail a stop 2 ticks below the price action". We watched the price rise and then quickly fall back down enough to trigger this 2 tick stop. We exited at 0.23 a few minutes after entry.
Right at the end of the day, WMT saw a surge in price/volume to close the day at 0.27.
Day 1 - End of Day Scan
Again WMT came up on our Breakout scans. Quite angry at myself for only taking 1 tick out of the day's action, I again set up WMT for purchase;
Close 0.27
Stop 0.225
Target 0.315
Position size 0.25% risk - the position size was less than 1/2 of yesterday's due to the increased volatility.
Day 2 - The Second Entry 7-Mar-2007
Again the opening was a frenzy of activity, with the Open at 0.315. Again I resolved to day trade this with a 2 tick stop as opposed to following my plan.
Entry was at 0.315. It rose to 0.32. It dropped to 0.31. 'Sell' I said, and my wife began to enter the sell order. It ticked up to 0.315. 'Hang on a second' said I. 'Let's hold on and see what happens. I'll take things from here.'
It ticked down....0.31...0.305...0.30. 'I'll trade it like I should have traded yesterday's action' said I and did not close the position.
By the end of the day, it had gone down to 0.25 with a low of 0.24.
I moved the stop up to 0.245.
Day 3 - Only one direction for this baby 8-Mar-2007
Market depth showed an overwhelming number of sellers as opposed to buyers, all jumping on the slightest bit of an uptick. It continued to decline, closing at 0.23.
Throughout the day, I was on the verge of buying more WMT thinking that it had reached the bottom. I figured I could rescue this trade gone bad. The temptation was enormous, but so was my internal struggle - I'd realized I'd already violated my trading plan twice, and I was aware of the perils of trying to catch a falling knife. In the end I sucessfully resisted temptation.
Day 3 - Clearly Violated the Stop
It took a lot of discipline, but we resolved to exit this on the open the next day rather than make the further mistake of "bottom drawing" it or hoping for a rebound.
Day 4 - Out with slightly less damage than expected 9-Mar-2007
Once again bottom pickers were out in force on the Open, allowing us an exit at 0.25. From there, WMT continued south to close the day at 0.22. Loss: 1.75R.
Discussion
1. Trading this according to our predefined plan for this circumstance would have seen us enter at 0.225 and exit at 0.25, a win of 1.2R.
2. We violated our plan initially because of greed - 'let's day trade this and make a lot of money'. Intead, we made a little bit of money. We violated our plan a second time before of fear - 'we buggered this one up yesterday, let's not bugger it up again'. We buggered it up again. This is all the more disappointing since we have not made either a trading error or violated our plan in a very long time. This is a perfect example of cutting one's winners short and letting one's losses run, a cardinal trading error.
3. Who's fault was this? WMT had all the hallmarks of a manipulated pump and dump, but the fault lies entirely with me for not following my plan which was thought out away from the immediate stress of the market to account for exactly this circumstance. The recent drawdown in this system probably played a part - the emotion of wanting a big winner to get the system out of drawdown was very strong.
4. My wife and I discussed how this panned out at some length, and concluded that we would continue to trade the signals presented and doubly resolved to follow our trading plan no matter what. We duly entered a trade again today (9-Mar-2007) exactly according to our plan...and were rewarded with a 1.4R win.
5. The one thing that saved us from really catastrophic loss was the very small position size we held on the second entry. Considering the huge sizes of the parcels being trading in this baby (pretty much its entire share registry was being turned over daily), a lot of people will have been sucked in and will have lost substantial amounts of money on this.
6. Emotion has absolutely no place in trading. It will make you buy and sell at the worst possible times.
7. The market has taught us a lesson and we have heeded its teaching.
A quick note - the system discussed has been designed to behave in a particular manner and has to date in all market conditions it has been tested and traded in demonstrated a very satisfactory positive expectancy with a very smooth equity curve.
Day 0 - The Initial Trading Signal 5-Mar-2007
One of the systems I trade is a short term system which uses a breakout as its entry signal. WMT signalled an entry on the 5th March 2007 when it closed at 0.20 on increased volume. This was during the depths of the recent correction, so there were very few bullish signals around at the time, and I was in the process of closing the 3rd loss in a row.
This system utilizes a profit target, so my entry conditions/stop loss were;
Close 0.20
Stop 0.18
Target 0.22
Position size 0.25% risk
Day 1 - The Initial Entry 6-Mar-2007
This system calls for an entry on Open the next day, so on 6th March 2007 we lined up at the entry. Unusually large volumes on both the buy and sell side were noted, and the IOpen kept going further and further up. My wife executes our trading signals - the idea is to decrease the risk of trading errors due to emotional factors on my part. I happened to be home before the open, so she called me to the trading screen - the Open was at 0.225, beyond our target price.
This circumstance had arisen once before during system paper trading, and after analyzing that trade we had written into our plan that in such circumstances we would enter the trade on the Open and not enter a sell target, managing the trade merely with an end-of-day trailing stop.
We entered the position at 0.225. We were both excited at this point, and I said "let's day trade this one - trail a stop 2 ticks below the price action". We watched the price rise and then quickly fall back down enough to trigger this 2 tick stop. We exited at 0.23 a few minutes after entry.
Right at the end of the day, WMT saw a surge in price/volume to close the day at 0.27.
Day 1 - End of Day Scan
Again WMT came up on our Breakout scans. Quite angry at myself for only taking 1 tick out of the day's action, I again set up WMT for purchase;
Close 0.27
Stop 0.225
Target 0.315
Position size 0.25% risk - the position size was less than 1/2 of yesterday's due to the increased volatility.
Day 2 - The Second Entry 7-Mar-2007
Again the opening was a frenzy of activity, with the Open at 0.315. Again I resolved to day trade this with a 2 tick stop as opposed to following my plan.
Entry was at 0.315. It rose to 0.32. It dropped to 0.31. 'Sell' I said, and my wife began to enter the sell order. It ticked up to 0.315. 'Hang on a second' said I. 'Let's hold on and see what happens. I'll take things from here.'
It ticked down....0.31...0.305...0.30. 'I'll trade it like I should have traded yesterday's action' said I and did not close the position.
By the end of the day, it had gone down to 0.25 with a low of 0.24.
I moved the stop up to 0.245.
Day 3 - Only one direction for this baby 8-Mar-2007
Market depth showed an overwhelming number of sellers as opposed to buyers, all jumping on the slightest bit of an uptick. It continued to decline, closing at 0.23.
Throughout the day, I was on the verge of buying more WMT thinking that it had reached the bottom. I figured I could rescue this trade gone bad. The temptation was enormous, but so was my internal struggle - I'd realized I'd already violated my trading plan twice, and I was aware of the perils of trying to catch a falling knife. In the end I sucessfully resisted temptation.
Day 3 - Clearly Violated the Stop
It took a lot of discipline, but we resolved to exit this on the open the next day rather than make the further mistake of "bottom drawing" it or hoping for a rebound.
Day 4 - Out with slightly less damage than expected 9-Mar-2007
Once again bottom pickers were out in force on the Open, allowing us an exit at 0.25. From there, WMT continued south to close the day at 0.22. Loss: 1.75R.
Discussion
1. Trading this according to our predefined plan for this circumstance would have seen us enter at 0.225 and exit at 0.25, a win of 1.2R.
2. We violated our plan initially because of greed - 'let's day trade this and make a lot of money'. Intead, we made a little bit of money. We violated our plan a second time before of fear - 'we buggered this one up yesterday, let's not bugger it up again'. We buggered it up again. This is all the more disappointing since we have not made either a trading error or violated our plan in a very long time. This is a perfect example of cutting one's winners short and letting one's losses run, a cardinal trading error.
3. Who's fault was this? WMT had all the hallmarks of a manipulated pump and dump, but the fault lies entirely with me for not following my plan which was thought out away from the immediate stress of the market to account for exactly this circumstance. The recent drawdown in this system probably played a part - the emotion of wanting a big winner to get the system out of drawdown was very strong.
4. My wife and I discussed how this panned out at some length, and concluded that we would continue to trade the signals presented and doubly resolved to follow our trading plan no matter what. We duly entered a trade again today (9-Mar-2007) exactly according to our plan...and were rewarded with a 1.4R win.
5. The one thing that saved us from really catastrophic loss was the very small position size we held on the second entry. Considering the huge sizes of the parcels being trading in this baby (pretty much its entire share registry was being turned over daily), a lot of people will have been sucked in and will have lost substantial amounts of money on this.
6. Emotion has absolutely no place in trading. It will make you buy and sell at the worst possible times.
7. The market has taught us a lesson and we have heeded its teaching.
