This isn't quite the post I thought I was going to make, but I feel this is more interesting and probably useful. TLDR; I ignored my own advice but learnt from the experience.
So last week, I made a post about how the moves last week were just a pullback and nothing to be concerned about. Really just part of the standard procedure for the markets after the big run-ups we had.
This week I have to admit that I didn’t completely listen to my own advice. By last Thursday, I became somewhat convinced that the markets were on their way to correction or worse. Even someone who has been trading for a while can be influenced by their emotions, despite being aware of them, guarding for them and generally trying to ignore them. In summary, managing emotions is bloody hard. And having a plan, knowing your emotions and trying to manage them isn’t always enough.
So what did I do? Well, I can say that I didn’t panic sell any of my positions or even adjust my stops (which for most of my US positions was great, as they recovered on Friday – 14 May).
So what did I do? I ended a couple of defensive option positions to hedge my positions. To some of you reading, your probably thinking, what’s wrong with that. Seems like a sensible precaution to an unstable market. And to some extents it was.
But what was wrong with the trade:
At the end of it, I wasn’t too costly a mistake as I still ensured that I position sized correctly (always harder with options, on this occasion I used around 2/3 loss stop – which with options is not guaranteed) and didn’t over do it.
Let me be clear, despite my risk management they were still bad trades.
So what did I learn.
So what steps have I put in place to stop this from happening again?
So more on that second point. Recently I’ve been reading more on behavioural investing; specifically, I’m now reading Daniel Crosby’s first book. One point in so far that has really struck a chord with me is this. When you think of giving back open profits as a loss, it affects your mindset and emotions, which can and does impact your trading.
What Daniel recommends is reframing this. Most of us who are on the journey to profitability have no problem taking a loss when our stop is hit when we first enter a trade. But it seems very difficult to take that same hit when we’ve had a big open profit. Crosby opines that this is essentially due to we’ve already counted those open profits, as profits and mentally treat them the same a realised profit. Therefore it’s much harder to take the loss. This is a mistake that I (and I’m sure many other traders) have made over the years.
To deal with this, a trader can shift their view of open profits to not consider it a profit until it’s realised (however, I should say here don’t do the same with an open loss, just cut that sucker). Personally, this reframing has allowed me not to worry so much about the givebacks, as they were never mine in the first place. As long as my overall capital is increasing, I’m happy!
Anyway, that’s enough for now.
Thanks for reading, and I hope you’ve found this interesting.
Nick the Trader Guy