A Positive Negative Trade and a Hallelujah Moment

Bad Assed Trader: OK so I broke my rules yet again and will have to confess to Younger Daughter The Monitor when she comes home from school this afternoon and be denied my glass of wine this evening as punishment. But I don't care because my rule breaking has led to ground breaking.

So, from the beginning.  I've been on holiday in sunny France for just over a week and although I did check the charts every working day my set up didn't come.  Tuesday was departure day and we had to leave the house at 11.15am.  My dedication to trading knows no bounds so I got organised the night before and was up ready to trade at 6.30.

My set up came and I took the trade.  Followed my rules precisely and set a target which was hit just over 2 hours later.  4.3%.  One of my best ever.  And I was cool as a cucumber the whole time, it was just fantastic.  My first trade and I was already ahead of my 3% target for the week.

I wondered then, should I just not trade anymore this week and allow myself the wonder of being so far up at the end of the week.  I have heard that many traders do this and I've read that often we are most likely to lose money after having a really good winning trade.  But my rules are simple: if the set up is there then I take the trade, whether I've done well or not.  Instead, I told myself I must be extra fussy as I'm now "vulnerable" as they call it in Bridge.

Quick Bridge diversion:  The scoring rules of Bridge are very complicated and still largely beyond me (I can just about handle the playing part) but I have come to learn that when one side has done well in a hand they are then labelled "vulnerable" which means that if their opponents beat them at the next hand then the opponents score extra points but if the winning couple win again then they gain extra points.

The dictionary defines vulnerable as:

1. capable of being physically or emotionally wounded or hurt

2. open to temptation, persuasion, censure, etc.

3. liable or exposed to disease, disaster, etc.

4. (Military) Military liable or exposed to attack

5. (Group Games / Bridge) Bridge (of a side who have won one game towards rubber) subject to increased bonuses or penalties

This interests me greatly as this is exactly what happens in trading when one has a fab result, you do literally become vulnerable - open to temptation and more capable of being wounded.  I believe it is because the emotional side (greed...fear etc) has been triggered by the win.

So my logical brain tells me I'm vulnerable and to watch out.  But my limbic brain (the bit that harks back to when I evolved from a single cell amoeba and is responsible for my irrational and emotional behaviour...just occasionally you understand) is having none of this caution, is excited and is secretly plotting to get in there again as quickly as possible.

On Wednesday then, before toddling off to my paid employment, I check out the charts and a battle is fought in my head between the two bits of my brain (not a pretty sight).  My set up is still some way off but the Euro is very bullish (strong) at present and my rat (limbic) brain is itching to get in and fearful that I will miss out on a move if price bounces off the 20 Moving Average instead of retracing all the way to the 50.  Ratty brain finds missing out on a 5% move much more painful than losing 1%.

My rational brain tries to take a stand against ratty by pointing out that my rule is for price to bounce off the 50MA and that in our experience price doesn't bounce off the 20MA as consistently. Rational brain urges us to stick to the rules.

But this rat brain is strong.  It seduces the rational brain by telling it what a clever brain it was at understanding price action so much better and that now it was more experienced it could CHANGE the rule (not break the rule of course) and from now on start taking trades with a bounce off the 20MA.  Ratty pointed out how everything else about the set up was falling into place and that the risk was only 1% and I already had 4.3% in the bag so could afford to risk it...

Ratty brain won.  But the trade didn't.

At first I was pissed off (I believe ratty brain was then blaming rational brain for not sticking to the rules) but I'm lucky in that my rational brain has a special feature.  It's been pointed out to me a few times by various people and comes in handy at times like this. I don't know where it came from but it's dead useful.

I'm always looking to turn a problem into an opportunity.  So whenever the situation is difficult or seems bad I tend to look beyond the immediate crap and try to find that opportunity.  There always seems to be one there, whatever the situation.  It may be that I'm planning my way out of trouble again (see my blog of 6 April for more detail) but it is a handy skill.

So on this occasion, where ratty brain triumphed, I firstly allowed myself to feel the pain of disappointment in breaking my rules and losing a trade and didn't try to avoid it.  Strangely there wasn't much pain there at all once I put it under the spotlight.  And then my rational brain looked for the opportunity in the mess and found one.

Hence the Hallelujah Moment and turning a negative trade into a positive one.

I suddenly realised why I've had so much trouble sticking to the rules and how I could overcome that.  And now I've realised it seems so bloody obvious I'm a bit ashamed of myself for not twigging earlier.

The background is that I've never been very good at following rules given to me by some higher authority.  I know I'm better if I have created the rules that I have to stick to - that's ownership for you (and my stubborn personality).  But it's mainly because I then understand the reason for the rules.  I know I am someone who needs meaning.  I always need to understand the strategic direction in my work as a Faceless Bureaucrat to make decisions and hate it when there is a contextual vaccuum (as there is now in the NHS as we all pause and reflect with Mr Lansley).

What happened when I mulled over this trade and this particular rule about bouncing off the 20 or 50MA is that my rational brain had to confront and fully appreciate the two reasons why I have the rule about the 50MA.  The first reason is that when the trend is up the 50MA is lower than the 20MA (because it shows the average price of the last 50 moves rather than the last 20 which will have been higher in an uptrend) and so if price has gone that much further down in its dip then it has that much further to go back up - hence the good rewards (3, 4, 5%) I get when my trades are successful.

The second reason is that price often interacts with the moving averages on its way down, so when I watch price retracing back to the 50MA it often appears to start to bounce on the 20MA - enough for something like my set up to occur - but it doesn't then bounce right up to the place where I set my target (the main resistance line for the day).  If I was looking for just a few pips, maybe sometimes 20 pips, I might get them by trading the bounce on the 20MA but I'm not.  That's not my strategy.  So it is completely daft to take a trade off the 20MA.

I feel so much better for understanding this at a much deeper level than I did before.  Maybe I'm just the dimmest or slowest trader in town but it's taken me a while to appreciate fully why I have that rule and therefore why there is absolutely no point in breaking it.  Prior to yesterday I was just relying on me telling myself that it is my rule and I mustn't break it.  But now there is real meaning to the rule and I am fully conscious of the meaning. Perhaps it will have even got through to ratty brain.

I reckon that now I will be much less likely to break that rule again. Especially since I have now removed the 20MA from my hourly chart so I won't be able to take a trade off it as I can't see where it is anymore.  If I recall correctly this is something my coach Emmanuel suggested I do a few weeks' ago - he's obviously light years ahead of me...which is why he's a coach and I'm still wrestling with my ratty brain.

Battle of the Brains - that green mass up top has to win out in the end
Top: Human Brain
Bottom: Rat Brain

Hair Raising Performance

Bad Assed Trader: When I first started trading I could imagine succeeding but it was only in complete ignorance.  I had no idea.  It's like imagining yourself driving a car when all you've done is sit on the pavement and watch people getting into cars, driving and getting out.  You have no knowledge of gears, brakes, clutch, mirrors, hazards, road signs, stalling, other road users, roundabouts, crashing...

You have no insight into what sort of a driver you'll be - aggressive, timid, safe, risk averse, foresighted, impatient etc or whether you'll even like driving.

Only when you get into the driving seat and the instructor takes you through the driving tools, the dashboard of indicators and all the complexities do you start to comprehend how much information you will need to process simultaneously in order to launch this thing onto the road and safely reach your destination at a reasonable speed.

So it has been with trading. First learning to go and stop.  Accelerator and brake or place the order and stop loss/target.  The market is everything external: the road conditions; other road users, some of whom are completely barmy/random; and the car itself which may have erratic performance if it's like any of the cars I had as a student. Thank God for AA membership.

When my dad (bless him) was teaching me to drive he would, on occasion, sit gripping the sides of his seat, his arms rigid and his shoulders up by his ears.  When he did this he went very quiet, I couldn't even hear his breathing.  But once I sensed the shoulders easing off and the lungs exhaling the words would come, in a controlled manner through gritted teeth: "You were only an inch away from that tunnel/car/wall..."

My reply was always chirpy: "That's OK then, an inch is all it needs dad"

I didn't hit anything, well at least not whilst my dad was with me in the car, but that's another story.

If my dad sat next to me during my trading I suspect those shoulders might get reacquainted with the ears because often it seems that with my trading style price does come perilously close to my stop loss before heading back towards my target.  This is because with my snipers I always have a 20 pip stop and even if price initially goes my way it often retraces back a good 15 or 16 pips before bouncing back up.

I've learnt to expect this to prevent my own posture deteriorating into something akin to Quasimodo.

But coming back to my vision of success, the first few times I drove a car it seemed unlikely I would ever pull it off and become a safe and efficient driver.  I've since driven hundreds of thousands of miles over nearly 30 years - argh! - and not (yet) been involved in a car crash of any significance (ie no injuries to any party)...long may it last.

During my first 6 months or so of trading I gradually started to actually see and comprehend the complexity and bizareness of the external conditions and my dashboard of indicators.  I also slowly realised that my performance as driver fluctuated between being a slow fool and a reckless idiot.

What took 2 or 3 driving lessons has taken 6+ months of trading - gaining the ability to visualise in a more informed way (rather than from complete ignorance) how one might actually be able to ride this thing without crashing.

But as with driving there's also a time lag between being able to see how one might actually be able to trade with some consistent success and achieving that.  One's inclination to take corners with a little too much speed, one's inability to use the clutch smoothly, all leading to dents in one's confidence if not in one's paintwork. And so it is with trading - jumping in too quickly and not riding smoothly to target - leading to dents in the trading account.

The skills need finessing.  Overconfidence one minute, depression at one's jerky start off the next, and then panic when stalling at a busy junction.  Yet with persistence, patience, discipline and the right safety mechanisms in place the goal can be realised.

Gradually I am honing my skills to trade and I can see the journey will take months/years.  I understand it takes longer to see the results in trading because of the significantly random aspect of the market and because it is a harder set of skills to acquire.

The psychological aspect, the winning and losing money, the greed and the fear all massively affects the trading performance in unseen, unheard and often undetected ways until one honestly identifies it in oneself and deals with it.  Not masking it or avoiding it but actually confronting it and working through it.

Here the similarity with driving ends.  There is no such need to work through one's weaknesses and self delusions when driving, which is why we all agree that the roads are full of idiot drivers and that those driving more slowly than us are fools, those more quickly - reckless, and the rest are stalkers.

Pain and Punishments

Bad Assed Trader:  I'm still on the pain theme today but promise things will get more upbeat by the end of my blog this time.

I've been reading a fascinating book recommended to me by more experienced traders and yet again lessons from reading/listening to professional traders coupled with my own trading efforts, have combined to point the way forward for me.

The book is "Market Wizards" by Jack D Schwager and is a set of interviews with renowned traders.  It is unfortunately comforting to read of the pain that successful traders went through in their journey to finding and keeping their edge.  I'm ashamed to say that I was particularly pleased to read about an experience one trader, Michael Marcus, suffered.  He describes what he considered one of his worst mistakes:

"During the great soybean bull market, the one that went from $3.25 to nearly $12, I impulsively took my profits and got out of everything.  I was trying to be fancy instead of staying with the trend.  Ed Seykota (his colleague and role model) never would get out of anything unless the trend changed.  So Ed was in, while I was out, and I watched in agony as soybeans went limit-up (maximum rise possible in a semi managed market) for twelve consecutive days.  I was real competitive, and every day I would come into the office knowing he was in and I was out.  I dreaded going to work, because I knew soybeans would be bid limit (highest price possible) again and I couldn't get in."

Jack then asks him "Was this experience of not being in a runaway market as aggravating as actually losing money?" and his reply resonated for me given my recent pain on missing the Euro shooting up:

"Yes, more so.  It was so aggravating that one day I felt I couldn't take it anymore and I tried tranquilizers to dull the mental anguish...that was the low point in my trading career."

So it seems I'm completely normal then - the pain of missing out is commonly felt.  Having read a few of the interviews it appears that when learning to trade we have to go through these various painful experiences and get over them a few times before we become, as Emmanuel tells me, "numb to it".  Many people quit when feeling such anguish, a natural reaction to pain aversion, but not one that helps you to learn and improve your trading and develop your resilience as a trader.

Emmanuel urges me to feel pain when I don't follow my rules rather than when I lose a trade or miss out.  He is right and I am trying to teach myself to do this but it is simply very hard.  I have not done well on sticking to my rules and have now managed to work my way through the entire alphabet in attempts to take the string of 20 perfect trades which is my goal.  I'm now on AA, and that was with (a) and (b) versions of V as I lost track a little at that point.  W and Z were whisked through with unseemly haste on my part - I managed only one trade in each of those attempts, failing to stick to my rules both times.

I was embarrassed to report to Emmanuel at our coaching session on Wednesday that I was still failing to follow my rules and he challenged me to think of a decent punishment I must take when I break them.  One that will really put me off breaking the rules.

Having relayed my failings to my younger daughter Ruby she has now taken me in hand.  She has shown amazing discipline in getting on with her GCSE revision, in developing and sustaining her blog http://rubyccino.blogspot.com and in pursuing her goals and I am put to shame that I can't follow my own rules to succeed at trading.  Between us we have devised a cunning plan designed to keep me on the straight and narrow.  She will require reports of my adherence to the rules every evening and if I have failed then I am denied any wine with dinner that night.

This may seem a bit pathetic but is a big deal to me - I love my glass or two of wine every night.  It was actually the first punishment I thought of when I started trading and knew I would have to find a way to make myself follow the rules.  But I was too weak willed to inflict it on myself.  Now Ruby will be monitoring me (the humiliation!  Get over it girl - it's your own fault) and we both know that I can't lie, it's just not me.

It is already starting to work.  We agreed it yesterday morning and although I have put on three trades since they have all followed my rules.  The first one, on Euro yesterday, gave me 3%, the next two have lost me 1.65% in total.

Following your rules is essential to developing the confidence you need to make it in trading and to help overcome those awful feelings of pain when we lose or miss out.  As Richard Dennis, another trader in the book says,

"It is totally counterproductive to get wrapped up in the results...being emotionally deflated would mean lacking confidence in what I am doing."

The interesting thing with trading is that although you need to develop that confidence it is even more important not to become over confident, which I think deep down is my own problem - my first mentor in the health service once commented that I wanted to run before I could walk (he later denied saying it when I reminded him but it hit the spot for me at the time - and I still remember it 20 years on).  Running before you can walk in trading leads to inevitable, inescapable falls.  As Paul Tudor-Jones, another trader in the book says:

"Don't be a hero.  Don't have an ego.  Always question yourself and your ability.  Don't ever feel that you are very good.  The second you do, you are dead."

A tricky business indeed, but fascinating. Gradually I feel I am unpeeling my own psychology and spearing each wayward habit, defense mechanism and inclination.  Once I have spotted those gremlins and identified them it is more difficult for them to subconsciously control me.  Last time I realised I was not working through my pain but either masking it or planning my way out of it.  This time it's a different gremlin....

Latest gremlin identified: The urge to run before I can walk - which leads to overconfidence and breaking my rules

Dealing with the Pain of Trading: Part Two

Bad Assed Trader:I’m learning a great deal about myself from trading – more than I could have possibly imagined.  The last week or so has put me through a testing time.  Not because I’ve lost any significant amounts of money, I haven’t.  It’s all about the baggage I bring to trading and the hopes, fears and greed I have to deal with before I can succeed at this craft.

I have reflected on my feelings and why I have felt pain from missing out on a big move and how I deal with the pain.

Many of my mechanisms for coping in life have come from my perceived need to avoid pain and fear - pretty logical I guess.  As a child and in my early teens I often feared doing things, particularly going to places on my own.  I don’t know where that fear came from but I remember it vividly.  But at about 13 I learnt a method of dealing with this fear.  I would imagine that I put on a raincoat and that the things I feared (daft things like being the odd one out, no-one talking to me, everyone looking at me) were just rain drops that would run down the waterproof surface.  The raincoat in my mind was my defensive shield and it worked, after a while I was doing it automatically.

But now I realise that this technique didn’t actually deal with the fear, it just masked it.

Similarly, when I suffered the pain of loss or hurt (like if I felt someone was mean to me) I would think about and imagine the future and make plans which would take me away from that pain.  I used the hopes I had for the future to deal with the pain of the past.  Again, this technique worked to a degree in that I would take positive action to address my position and I learnt the skill of planning and implementing change.  I'm quite good at that now - hence the career in faceless bureaucracy - so maybe I should thank the nasty people I suffered in my childhood....

But now I realise that this technique didn’t actually deal with the pain, it just shifted the focus of attention elsewhere.

My techniques were not about living in the Now or acknowledging my reaction to issues.  They essentially avoided why I was feeling pain.

Success in trading is all about being in the Now – not masking the pain of the past and not hoping and thinking of the future.  To succeed I have to learn to be in the Now completely.  Without mastering this fully my trading will always be flawed.

For a few days after missing the trade as I reported on April 4 I felt a knot of anxiety (or pain) in my chest.  It’s nothing of physical origin – I’m in fine health physically.  The knot of anxiety was related to my feelings about trading.  I thought I had accepted the outcome of the last couple of weeks but the pain was there urging me to give up – or think about giving up.  This is something I have not seriously considered and am not going to do.  I will not give in to this pain.  It existed because I unconsciously created it.  It existed and lingered because I was not able to use my usual techniques of masking it or planning my way out of it.

Each time in trading I have hit the buffers and it’s got really hard I’ve been able to come up with a new solution – a new plan – to deal with the perceived problem such as sticking to one strategy or one currency pair.  Each time I have felt the pain of disappointment in my trades I have been able to plan my way out of it and then felt great – full of hope!  And each time I have thought that the pain has gone, planned away, but really it was still lurking there ready to come back when my plan failed or there was a glitch of some sort.

I know I was right each time to reflect, analyse and take stock and even to plan what action I needed to take – and then to take that action.  But now I realise I have to deal with this pain.

Reading the book my coach Emmanuel recommended “The Power of Now” has made me realise I shouldn’t mask or defer this pain but instead acknowledge it, scrutinise it and work through it.  In the book Eckhart Tolle says we should shine a light on our pain.  It is all part of surrendering to what is (ie the fact that I have lost a trade or missed a great trade), accepting what cannot be changed (the past) and instead moving into the present.  It’s about letting go, but not doing that by avoiding, instead really focusing on the pain as an interested observer.

In "Trading in the Zone" (which I am now reading for the fourth time - I must be a slow learner) Mark Douglas says we traders feel pain because we are not fully accepting the risk of trading and the outcome of that risk.  To succeed as traders we have to accept that the market has a lot of random action and that we are taking a risk.  When our trades fail we have to be open to learning from them and we're not as open to that if we feel pain as we are then more likely to take action to avoid future pain.

I’m now realising how the techniques I have used for the last few decades which did actually seem to help me in many ways – by blocking or avoiding feelings of pain – will not work now with trading.

These pain avoidance feelings are still guiding me rather than what I actually see on the charts being my sole guide.  This is emotional trading.

I had lunch on Monday with a couple of really good friends and one of them was speaking about how he realised in his later years that at times of stress or pain he needed to “step outside himself” and look at what he was feeling and why.  Even though my friend had not read Tolle’s book he was actually reinforcing the message inside it which is the message that my coach is trying his best to get me to understand. This is the message that we need to become more aware, more conscious of our feelings, why we feel the way we do and to accept what is.  It is only when we step outside of our emotions and look at them objectively that we can fully understand what is guiding our behaviour and be free to determine how we need to act instead. 

This applies to trading and to life in general.  But whereas we can survive life without this skill it seems the trading can be seriously undermined without mastering this.

I have to acknowledge the amount of baggage I’ve been bringing to my trading in terms of hopes and fears and train my mind to focus on the Now moment, free of this baggage, as well as fully accepting the risks which are inherent in trading.  I know this is going to take time, I have quite a few years’ worth of baggage to exorcise.  

But until you realise you have a problem and what it is you cannot fully address it.  I can see this is going to be a long journey....

Dealing with the Pain of Trading: Part One

Bad Assed Trader:  You might have guessed from the title that this blog is not going to be a gloating one. But whenever I get knocked back I do take stock and try to find something to learn from what happened and today is no different.

I had thought that the most painful part of trading would be losing a trade.  I don’t find that especially painful anymore, particularly if I have followed my rules.  I know that losing is part of the randomness that is the market and it’s the stake you put on the table to play the game.

Last Thursday I discovered a new pain.  The pain of seeing price go exactly where you knew it would, without giving you the chance to trade it.

Last week was not the best of weeks trading-wise.  The tail end of the previous week was disappointing and then I was unable to trade on Monday and Tuesday as the Euro had been retracing on the daily chart and so on the four hourly price was just bouncing around the 50MA rather than showing a decisive trend which I need.

By Wednesday my patience was obviously wearing out as looking back the price was still choppy on the hourly and four hourly charts but I managed to persuade myself that conditions were ok to trade and off I went.  Two losers and a break even trade later and it finally hit home that Wednesday was not the day the Euro would start its journey north again.

So up I bounced on Thursday morning, all ready to go and find the Euro’s left without me.  It shot off without bothering to warn me.

Now I know I can’t take this personally.  The Euro, and the thousands of traders trading it, know nothing of me and my set ups. They have no obligation to form the particular pattern I look for and let’s face it they wouldn’t be able to if they tried.  But when you’ve been waiting for something for days and had a couple of aborted attempts and then the darn thing goes and runs off without you it can be difficult to accept.  Hence the pain.

But accept it I must.  It’s the name of the game with trading.  This will happen again.  And again.  Get used to it girl, I tell myself.

I’m over it now.  I sat myself down and reminded myself that there will be other opportunities, that this is a long term game, that it matters not one jot in the scheme of things.  All true.  Feeling pain is just resistance to the truth, the pain went once I accepted those things.

And then I think about what I’ve learnt.  The last few days were choppy and no good denying that.  When it’s choppy it’s best to steer well clear, otherwise you just pay for your inability to stay out.  It’s all part of that discipline.  So no more trading in choppy seas, just stick to the rules and understand that just because you have a set up, doesn’t mean every big move is going to announce its impending arrival with that exact pattern.  Duh!

But this is just the initial part of my analysis into my reaction.  It's not enough to just accept this.  I have to dig more deeply into why I react the way I do, how I have dealt with things in the past and why they need to change.  Watch out for part two....