Posted by: Bevan | March 25, 2009

Back On The Chain Gang

I took a break from trading late last year.  I had gone through a frustrating period of losses and basically lost faith in the potential of making money through trading.  The market seemed like a random series of fluctuating prices that was designed to make money for brokers, and steal money off virtually all other participants.

Fortunately my wife talked some sense into me, and in the New Year I began tentatively exploring trading again.  I realised that I had just given in to a loss of belief, which is as bad as, if not worse than, a loss of money.  Trading is undoubtedly a difficult game, one of the hardest professions to master of all.  I certainly think only someone with considerable game playing genius or a lot of luck could hope to make money consistently early in their career.  Its that consistency that is the challenge.  Anyone can make some good money – in my first few months I doubled my account!  However doing this month after month, year after year is damn hard.  You can’t rely on luck in this scenario, and need a real edge to your method to keep taking more than you use and keep probability in your favour.

The big thing that steals away your money seems to be mistakes and bad habits.  Stupid errors can result in far larger losses from a trade than you expect – I’ve only experienced this once and not too badly, but I can see that you could easily lose a fair percentage of your account with the wrong error at the wrong time.  Bad habits are an even more insideous problem, and I think most traders with experience can appreciate that what even the most mediocre trading books will tell you – that 90% of trading is mental.  Through carrying out an exercise from Van Tharp’s excellent book Trade Your Way to Financial Freedom.  I discovered that a serious problem with my mental approach to trading (by no means the only one though!) is a desire for excitement.  I can go for many weeks sticking to my methodology, however I end up getting frustrated with the lack of action.  For example last August I got sick of week after week with trades not triggering, trading opportunities that had too much risk for my account size and small losses.  Although overall I was ahead in my trading I just had to dabble.  I sneaked a few short-term trades in during the day from work when I could – great for excitement with some big wins on non-farm payroll day in the currencies, although giving it all back again just as quickly.  Then the temptation to try out a new strategy on my live account – it looked so good in the videos on the website.

All these things led to a depletion in my account – not serious but enough to make me question what I was doing.  That along with a necessity to use the money in my trading account for a necessary expense put an end to my trading for a while, and my loss of belief.

I’m back trading again after exploring my objectives and myself again.  I’m sticking to the strategy I was employing last year, although not as successfully this time.  Although I’m managing my risk, I seem to be losing consistently.  I think part of this is my small account size, which means that I’m having to concentrate mainly on interest rate futures and gold.  Although gold has shaken me out a few times it trends quite well, but not so the interest rate futures (although the past week has yielded some positive trades).  I feel that if I could engage in better trending markets such as the Indices and the currency pairs, however perhaps my strategy just doesn’t give me enough of an edge.  Its easy to look at those markets and see successful trades but ignore the unsuccessful ones.  I think at least I’m not losing much and getting good training in being consistent and disciplined.  That surely is the most important, and hardest lesson to learn.  Sure I need a winning strategy, however thats a lot easier to come up with than the attitude and methods of mental success.

I have tweaked the strategy slightly.  I tend to like the idea of holding trades for a long period and letting them run, prompted partially by reading a lot about trend followers.  I can stand drawdowns however I think my initial exit strategy of waiting for a five day low was just giving away too much profit.  I’ve gone back to my exit strategy from last year of using Alexander Elder’s safezone stop which still lets the trade run but reduces drastically the number of 1R losses as it starts trailing the stop more quickly.  I did find it a bit frustrating last year as it got me out of a couple of good trades too early, but then again my overall performance was better.

My main priority is in investing as much as I can each month to build up my account size to £10000 plus so that I can safely invest in other markets such as the currencies where I believe that stronger trends will suit my method and style of trading better.  I also have a challenge in trying to find extra time (I have a family with a new baby on the way) to do some serious strategy testing in order to diversify my methodology a bit and perhaps take on more short-term trades.

After a few false starts I'm in the recent uptrend in Short Sterling

After a few false starts I'm in the recent uptrend in Short Sterling


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