Latest large short cable trade a repeat of a familiar unhappy pattern for me : Identify a beautiful looking chart, get excited, put on larger than usual position, lose trading discipline due to granting of "special" trade status, end up with big loss.
Why run larger than usual risk? Greed, unhealthy desire for taking short cuts, illusions of making mini-Soros killings.
Recent GBP trade : Position 4x >Jan JPY, 2x >Feb GBP trades. Result : Gave back all of Feb GBP profits when trade went wrong. Overall, from way ahead YTD budget, am now 40% under budget. Feel like an idiot.
All of my previous big losses have started with the "perfect" chart trade setup. I am always very disciplined in cutting losses on "normal" trades. It's the "special ones" where I stumble, a bit like spoiling your favorite child.
Solution : Henceforth give up even thinking about going for the jugular again. Impose a maximum exposure risk limit of 25% (of overall trading limits) on a single trading position. All positions will be treated equal, no favored sons given special leeway. Give up on home runs. From now on, it's all just going to be singles and doubles.
To paraphrase Kipling : "If I can meet with Normal and Special, And treat those two impostors just the same, Mine's the Earth and everything that's in it, And which is more, I'll be a T4L Success."
This is not a new realization. But I keep coming back to make the same mistake of stepping up and blowing up when things are going well. No more, I swear. From now on, I will just keep the old rules and not change anything just because a trade setup looks perfect.
[Made minor adjustment to the Risk Table. Will now explicitly display the actual % risk of each position, so that it is immediately clear there are no "specials".]
This is a TREND trading blog. I am not meant to be making trades against the trend. Either with the trend, or square.
Costly departure from this yesterday. Never again.
Trade : Was short at -93.30, held into BOJ meeting where consensus was caught by surprise shock and awe outcome. By the time I got back to my desk, it was above 95.50.
Mistake 1 : Was positioned against the uptrend, for what reason I don't want to recall. Mostly to do with trying to be too clever.
Mistake 2 : Was a relatively tiny position, so had no stop loss order in.
In the end, cut at +95.28 in the early sell-off just after the ECB meeting (later reversed). 200 pips on a small position still adds up to a significant L.
Original plan to pyramid short EUR/USD position on close of NY business below 1.2287. Market, however, ran sharply ahead and made a low of 1.2162 before I could do anything. Sometimes it pays to sell the first break way ahead of week's close. Other times, being patient and waiting till the last few hours is better. This is very much about luck, no hard and fast rule. No issue here.
In my anxiety of missing piling onto an ever larger Risk Off position, I sold gold at 1559 instead, before the sell signal was confirmed by the weekly close below 1570. First big mistake = being greedy.
Disregarded my own earlier conclusion that under current market conditions, not all Risk Off proxies are created equal. eg 1. S&P500 - as proven time and again, people like to buy on dips no matter how bad the news. Selling this is not a good Risk Off proxy. eg 2. Gold - again heavy support from all kinds of buyers eg central banks. Until a confirmed technical break, I must not jump the gun. 2nd big mistake = lacking focus.
I'd best stick to shorting EUR/USD if I want to increase Risk Off exposure. Commodities a bit dicey due to threat of QE3.
[Short Gold stopped out at 1594 on Friday night]
Addendum 16Jul12 7:08 pm : Because of the error in Gold, I did not add on to the short EUR/USD as planned. Double whammy.
Was long USD/JPY as hedge against rest of Core Book which was Risk Off. Took off the hedge at 78.33. Reason - got greedy because wanted more naked exposure to Risk Off which was rewarding me handsomely.
Cutting loss on the hedge was big mistake. I should have known better. Threat of BOJ intervention + Japan does not need stronger JPY = Hedge loses some money when rest of Risk Off is doing well + Hedge makes back alot more when Risk Off is suffering.
Also stopped out short S&P and Corn yesterday to reduce Risk Off exposure. Protect what I have left.
Previously, my trading could be characterized by "being there regardless" wherever there is an underlying trend. Trade entry location was ranked much lesser in importance than being on board. This has to change. I can no longer afford sub-optimal trade entries that are smack in the middle of an underlying trend that has gone on for some time (because then stop loss levels are less clear).
Going forward, trade initiation here will based on weekly charts and only allowed for either 1. completion of a fresh trendreversal, followed by a breakout pattern (SHS, double tops, etc); or 2. breakout from a trend consolidation pattern (eg triangle). In short, only get in at the beginning, or only after breaking out of a consolidation in the middle, or not at all. This should help me cut down over-trading.
Effectively means that I will be spending a lot more time scanning
charts and stalking markets than on actual trading. (Blog posts on
trades will correspondingly be a lot fewer too). T4L will be a game of patience above all. 80% watching, 20% doing.
I will no longer initiate any trades based on daily charts. Daily charts will only be used to micro-manage risk ie either reduction of risk when trend is short term over-stretched or pyramiding on desirable chart pattern formation.
Still not topped up Saxo account yet. When I do re-start, it will be back to first principles (see fatal flaw #3) ie objective is to NOT LOSE MONEY, whatever equity level (% of risk equity) I top it back up to. If I can achieve that, making money will naturally follow in due course.
Before the MF Global fiasco, I used to leave 100% of my trading capital with MF, and my rule was to use no more than 25% of that at any one time for supporting risk positions.
Post-MF con job, I started with only 1/3 of my intended risk capital in my margin account with Saxo. Instead of capping IMR usage at 25%, I had upped it to an equivalent 75%. The balance 2/3 of earmarked risk capital is held in my bank account, not with Saxo.
Fell into same trap as I did in 2006 (-90% between Mar-Jun2006). Fresh start, expectation of a divine right to succeed, got careless. Before I knew it, a series of bad trades and my Saxo account is now down 75%.
The only positive out of this is that unlike in 2006, I did not make the mistake of averaging losers. This time round, it was an unbroken series of bad trades that killed me. Part of the problem was caused by the separate equity locations - as I was losing money in Saxo, I kept thinking I had more than enough capital to support continued trading with funds outside Saxo. False comfort from head in the sand approach. Instead, I should have stopped trading as soon as the Saxo account drawdown got serious. First order of business should have been to make sure the account survives on its own.
However I look at it, this is a FAILURE OF TRADING DISCIPLINE. After 2006, I have not had a single instance of having to top up my margin account. Now, am delaying required transfer of funds from bank to Saxo until I get myself mentally sorted out. Not trading until I am over this.
I need to bring down the 75% Saxo limit to a more realistic level to avoid blowing it up on a standalone basis, regardless of additional segregated risk capital. Margin calls are very damaging to trading confidence and psychology and to be avoided at all costs.
Any time you have to top up your margin account is a bad time, however small the amount you started the margin account with. Don't do it until you are sure you have absorbed the lessons of the prior circumstances leading to that account drawdown.
[Actually have 2 token positions to maintain interest and sensitivity to markets - long 1 lot each of SFM2 @ 1.0937 and TYM2 @ 130-13 (GTC just filled). Intention is to buy more TY into large dips].
Was short at 1893 but got taken out for only a small profit as confidence was shaken by unfortunate circumstances.
Monthly : Single black reversal candle is not be a reliable sell signal in itself. Respect uptrend still until a more reliable top is confirmed by a formation of several candles. Big picture = uncertain, stay out. Parabolic top = huge down possible anytime.
Weekly : Going down.
Daily :Double top around 1920. Neckline 1702. If confirmed, $200 worth of downside to $1500 possible.
Plan : Can't bring myself to sell now having just snatched defeat from the jaws of victory. Re-establish long (ETF) only from around $1576 downwards, if ever. Remember parabolic corrections will almost always over-shoot.
Lesson : Remember there is never "this one is different". Similar experience (spread can't possibly go negative) in ED spreads in August. Trust the charts and only the charts.
Suffered my biggest 1 day loss ever on a single trade.
Paid heavily for going against charts. Weekly and daily were ugly when I went long yesterday. Thought I was doing my tiny bit to give moral support to suffering Japan. How frivolous.
Never again will I make such a trade based on sentimental reasons. Never over-ride charts for whatever reason.
Long at 103 .. out around 110. Completely misjudged how far and how quickly this can run.
I feel fear when I see exponential curve price action such as this, even if I am on the correct side. Bad mistake.
Lesson for future .. OK to take profit but retain at least 1 contract on a trailing stop/reversal out basis. Missed the meat of this move by taking profit much too early.
(A) took out my trailing stop on my nice long position. Missed (B) as a result. Then again, perhaps fortunate not caught short given reversal (A).
Trying to think how else I could have done better. Given my objective was 552, maybe I should have lightened up a lot more when I sold 522s (near objective). Then I could have sat out the pain of (A) with a stop below 452 on the remaining small position. Easy to say with hindsight.
Post to record trade managed badly. As is usual with me, error was one of wrong trade sizing. Had trade on in too large size and panicked into cutting loss under what I still think is a noise-driven rally.
Angry with myself for making same old mistake again.
Technical picture still negative. Will allow myself a cooling period before contemplating whether to re-enter in a much more sensible size.
As I have emphasized time and again in the old blog, getting trade size right is infinitely more important than getting right system.
Been tracking this with great interest for months. Yet for various reasons - frightened by volatility, full plate, trigger shy, looks like this is one that has run away without me. Had many opportunities to sell this above 0.87 (see weekly chart) but did not. No excuses. Addition to list of mistakes.
Bearish on all time frames now. (0.8347 now).
Will try to get short if we see this near 0.84. If not. guess it was just not meant to be.
Extreme pain in left leg when sitting down. Either kneeling in front of screen or standing up. Short post here.
Anatomy of a trading mistake : 1226 was previous all time high. Broken and re-entry = warning signal for bulls. I was too hung up on using Gold as my Risk Off proxy against mainly short USD/CAD for Risk On. Died on both sides = price paid for ignoring warning sign.
Unwound most of positions now. Still have some remnant. Not a good 2 days for me, not just trading wise.
