Note to Self

I just came across this angry note I wrote to myself last year after a particularly bad run of trades that could very easily have been avoided. Ever had that feeling? I find it often helps to scribble something like this down immediately afterward to help get that awful sinking feeling out of your system, and to remind yourself of the lessons you've (hopefully) learned. Enjoy...

You have completed screwed up [not the phrase I actually used] your trading discipline. You have lost over 200 pips because you:


• Exited trades too early
  
• Set arbitrary and unnecessary stop losses
  
• Allowed discretionary trading
  
• Failed to trade at the right time

You are no longer allowed to look at any trading application or chart outside of times you should be trading. You must exit all charts and applications immediately after placing a trade and keep them closed until it's time to review your position again.

On the bright side, the lessons I learned from this nasty period led me to trade with much more discipline in the months that followed, and as a result I've been having a good run so far this year.

Beware of Sloppiness

Yesterday I made a trade I shouldn't have, and I made it because I was rushing through my trading routine and not paying enough attention to important little details. In short, I was sloppy. And the result was I lost 21 pips I should never have even risked in the first place. That's the great thing about forex - you can usually put an exact cost on your mistakes.

In retrospect it's pretty clear to me why I was being so sloppy. I really wanted to make a trade, partly to make up for all my lost trades last week. I started updating all my price data with too little time to spare before my 5:00 pm trading window, so I was in a rush as well. Rushed data analysis + irrational need to trade = trouble. So when my system generated what looked like a valid signal, I placed a trade instantly without double-checking the key variables that went into the signal. It's always a good idea to double-check your data - especially if you're in a hurry.

The error I overlooked in my rush to trade was that I'd entered the date wrong. This isn't the first time I've gotten into trouble with dates, but in the past I took the time to double-check them. Not this time around. It's just about the simplest mistake I could make...and surprise, surprise, it's the simple mistakes that always seem to cost me the most. The good thing is they're also the easiest mistakes to catch.

So I guess the lesson here is, look before you leap.

My trading gurus, The Simpsons

If you've read this blog for at least a couple days you'll know that a subject I tend to revisit ad nauseum frequently is the importance of limiting your emotional involvement with the market. Getting too caught up in a particular trade or obsessively watching for new trade opportunities at all hours can lead you into a costly spiral of overtrading, second guessing your trades, trying to recoup losses by taking on excessive risk, and making yourself thoroughly miserable and possibly broke in the process. To avoid this type of addictive overinvolvement, one of the trading strategies I try to follow is the Fire-and-Forget Principle, in which all the key parameters of a trade are set beforehand, allowing the trader to just walk away until the trade completes itself.

Easier said than done, right? Because it's so tempting to keep checking on your trade once it's in progress, and if it's not working out, it's even more tempting to try and fix it. You know, move that stop-loss up a bit, or maybe move it down so the trade has more room to breathe, or how about just close it early and trade in the opposite direction? Once you've committed to firing and forgetting, how do you avoid falling into this trap? Well for me, that's where The Simpsons come in.

One of my favorite Simpsons episodes is a Halloween special called "Attack of the 50 Ft. Eyesores" in which a lightning storm causes giant advertising icons to come to life and rampage around Springfield (the Simpsons' hometown, for you Antiques Roadshow watchers out there). Desperate to stop the destruction, Lisa Simpson consults an advertising executive who explains that the marauding eyesores will lose their power if no one looks at them. To get the point across he then writes the following jingle, which is memorably sung to the townsfolk by Paul Anka:

To stop those monsters 1-2-3
Here's a fresh new way that's trouble free
It's got Paul Anka's guarantee...
[Lisa]
Guarantee void in Tennessee!
[All]
Just don't look!
Just don't look!
Just don't look!
Just don't look!

Well, the same idea goes for your current trade. To prevent it from becoming a monster that takes over your day, week, month, etc., take a break and do something else for a while, like go get a donut. (Sorry, all the donuts in this episode must've gotten to me.)

In all seriousness, the Simpsons' point is an important one: we grant psychological power to things by choosing to pay attention to them. By the same token, we can reduce their power over us by choosing to limit that attention, especially when it serves no good purpose.

OK, now that I've beaten that point into the ground, here's the episode in question, courtesy of YouTube:



Related topics:
Limiting your emotional exposure to the markets
The Fire-and-Forget Principle

What's the biggest thing you've ever thrown after a losing trade?

Being human, I usually get seriously annoyed after a trade goes the wrong way...I haven't thrown anything yet, but I have been known to mutter and curse angrily at my screen, the cat, my coffee, and anything else that happens to be in the room. Forex trading can be a pretty solitary pursuit, and as a result you can sometimes feel like the only person getting frustrated by the market...so it's always good to get some perspective and realize you're not the only one with issues. As Rich over at Forex Project pointed out this week, even the experts don't always make a killing.

The reason I ask about the throwing is because I was reading about a noted stock picker you've probably heard of because he's all over the place. I'm not going to name him because (a) guessing games are fun and (b) I don't want him throwing anything at me. But according to his Wikipedia bio, during his days running a (very successful) hedge fund he was noted for throwing telephones and computers around the office when the market wasn't going his way. (Not sure if they were laptops or desktops. Maybe Bloomberg terminals?) And this guy is one of Wall Street's great success stories.

So while I'm not recommending throwing heavy objects around the room, and while I still think it's wise to avoid getting too emotionally involved in the market, I also realize it's almost impossible to achieve perfect detachment and not get a bit worked up about a bad trade. Don't beat yourself up for being human...just try to learn from the experience. And who knows, maybe someday you'll have your own TV show.

Related topic:
Limiting your emotional exposure to the markets

Keeping Your Current Trade in Perspective

If you're like me and get overly involved in the outcome of each and every trade, it's useful to keep certain things in mind to avoid becoming obsessed, upset, or both by what's happening with your current trade at this very moment. Or now. Or...now. Because while every trade is important, in the overall success of your trading system a single trade will not make or break you. Nor will a series of them, if you're managing your risks well. Here's what I remind myself when I find I'm getting riled up by a particular trade that's not going my way:

• Every system fails some of the time.
  
  
• If your system works consistently, the failure of a single trade will have a negligible outcome on its long-term success. In fact, in a system designed for the long haul, a single trade represents a mere fraction of a percent of the final outcome.
  
  
• So this day went badly. You'll just have to tack another day onto your trading career. If you don't feel like you have an extra day to spare, you should probably exercise more.
  
  
• If you're compounding your gains and risking a fixed fraction of your funds in every trade, the dollar sizes of your losses will increase as your funds increase. If you're getting upset over how big a loss looks in dollar terms, remember it would be a lot smaller if your system wasn't working.
  
  
• The fact that a trade's going wrong is trivial. The fact that you're worrying about it constantly is the real problem.
  
  
• This happened 10 times last month and you still made a nice profit. So calm the hell down.
  

On the other hand, if you have no system or context within which to place a particular trade, you have much bigger problems than that one trade: in fact, you probably shouldn't be trading at all until you have a strategy that provides the necessary rules, risk management, and long-term perspective that are essential to a successful trading career.

So let's say you have such a system in place - when should you be concerned about the results of a single trade? Surely there's some point at which it matters? In my opinion, that point is reached only when a trade is part of a continuing negative pattern that varies significantly from your system's expected outcomes. The time to take notice is when events that should be statistical outliers start happening with unusual frequency. For instance, if your system's expected success rate is around 60% and you've just had 10 failed trades in a row, that's unusual: the odds of it happening are around .004%. In a case like this, I'd tow my leaking system back to harbor and put it in drydock to see where the hole is and if it looks fixable. (Sorry, that nautical metaphor sort of got away from me. But you get the idea, matey. Arrr...)

Related topics:
Limiting your emotional exposure to the markets
Sticking to your trading system

Words to Trade By

I just finished a great book by one of my favorite authors, Cormac McCarthy. It's called "No Country For Old Men" and is a chronicle of violent crime and drug running set in the Texas border country. McCarthy often gives his most troubled and troubling characters the best lines, and he's done it again with the arch-villain in this book, Anton Chigurh.

When I read the following quote by Chigurh, it immediately struck me as an insightful description of why people fail at certain ventures - that part of their character or temperament that causes them to overextend themselves, take on too much risk, and lose everything. And I think it applies especially well to trading (finally, the connection to forex!):

"Not everyone is suited to this line of work. The prospect of outsized profits leads people to exaggerate their own capabilities. In their minds. They pretend to themselves that they are in control of events when perhaps they are not."

Ever had that feeling? Me too.

So if you enjoy a good, tightly-written, philosophical crime thriller this might be the book for you. It's a tale where even the bad guys are worth listening to, as long as you keep a safe distance.

Related links:
Cormac McCarthy
No Country for Old Men

Signs You May Be Overtrading

As a recovering overtrader, I'm more than a little familiar with how easy it is to jump compulsively into a trade without regard for your strategy or for the consequences, which can often be costly. I recall one night I found myself up at 2:30 am while the EUR/USD market bounced up and down and I kept trying to bounce with it, except I was always too late, and I kept thinking the next trade was the one that would finally get me out of the hole. That was a very expensive night, and I don't remember sleeping much after finally heading to bed after 3:00. But even the worst nights have a morning, and so did this one: that one bad night of overtrading was the turning point that led me to begin developing a rigorous, tested, disciplined (usually), quantitative trading strategy.

Since I still periodically feel the urge to begin trading anytime I glance at a forex chart, I thought I'd share some warning signs that you might need to cut back your trading and think about a more strategic approach to the markets. Trust me, this is as much for my benefit as yours - I'm going to keep this list onscreen right beside my charting software.

1. If one chart indicator doesn't have a clear trading signal, you switch indicators until you find one that does (or looks like it does). What you're really doing in this situation is trying to find a signal that you can read enough into to justify placing a trade. The fact is, there are times when there just aren't any good trades to be had and you should be sitting on the sidelines. If you can't accept that, you'll end up making lots of trades you shouldn't.

2. You feel the urgent need to place a trade within five minutes of opening a forex chart. Just looking at the chart makes you feel you absolutely must be trading right now, and anytime you open a chart you spot some trend or indicator that you should be taking advantage of. You're a bit like the person who needs to place a bet anytime they walk by a roulette table.

3. When you're away from your forex trading platform, you feel like you're constantly missing trades. You feel intense frustration and disappointment when you see a trade you could've made but didn't. You spend a lot of time thinking about those trades you missed. Sometimes you wish you could stay awake 24 hours a day because then you wouldn't miss out on all those trades.

4. You have a trading system but you constantly make exceptions to it. You have an ever-growing list of excuses and rationalizations for why you trade outside your system:

• You'll only do it once (until next time)
• You're not risking very much
• The chart is showing the perfect trade set-up and you'll miss out on huge profits
• Look how active the market it right now! I have to trade since everyone else is.
• I'm trying out this new experimental strategy (well, then try it out on a demo system)
• This trade is actually part of my system, since I keep extending my system to include all my trades
• My system hasn't been working lately anyway
• It'll take my system at least a year to make me rich and I want to be rich next week

5. You're focused on "the one big trade" that will make up all your losses, and you're willing to make dozens of ill-advised trades just to make sure you don't miss that big one. And guess what, you discover no one trade is going to make up for all you've lost in bad trades and spread costs. At this point you might as well be buying lottery tickets.

6. You think that trading more often will make you more money. "If I can make this many trades with the 5-minute chart, imagine how many I can make with the 1-minute chart!"

My experience has been the opposite.

7. You think that anticipation, anxiety, impatience, urgency, late nights, a pounding pulse, and the rush of adrenaline are all part of trading and there's no way to trade without them. You're under the impression that you're more likely to trade well under these conditions.

8. You make trades so you can tell people about them. "Yeah, I traded the zloty at 3:00 am last night - pretty crazy, eh?" Yes, you're a brilliant, maverick currency trader, and you'll be broke in a month.

9. You have a "gut instinct" for trades that makes different, contradictory predictions every time it kicks in.

10. You can always find a way that your trade could have gone well, if you'd only done X, Y, and/or Z, and you resolve to do all of those next time. In fact, just to prove how well they'll work, you're going to trade again right now.

11. You cut short your weekend so you can trade on Sunday evening when the Asian markets are open. In fact, you find the whole weekend concept very inconvenient since you'd much rather be trading on Saturdays.

12. You have a history of being addicted to things and forex is the latest. This is no joke - there's a very real high to be gotten from trading, akin to the high from gambling or other addictive activities, and if you're especially sensitive or vulnerable to that type of response, you should be very careful about venturing into the currency markets. This is related to #7 above - many of the reactions I listed there are part of a potentially addictive physiological response, particularly for those with a predisposition in that direction.

I'm sure there are many more signs and symptoms of overtrading, so if you have any to add to this list, please submit them via the "Comments" link below.

Related topics:
Stop wasting pips! Strategies for cutting your trading costs
Limiting your emotional exposure to the markets
Trading at all hours? Get some sleep!
How I just wasted a bunch of pips for no good reason

Trading at all hours? Get some sleep!

One of the challenges I faced when I first ventured into the forex markets was the fact that much of the real action took place while I was asleep, or at least extremely groggy and sluggish. I'm on the West Coast of the US, and when New York and London trading is in full swing, I'm usually not in a state to make good trading decisions. At first I tried to shift my sleep schedule around, either staying up extreeeeemely late to join some of the early trading activity, or getting up far earlier than I would otherwise have considered sane or healthy to trade the tail end of the London-New York overlap.

The results of these sleep deprivation experiments (because that's really what they turned out to be) were a mounting series of losses, a growing coffee dependency, and a marked increase in my daily crankiness levels. As a rule of thumb, if you're trading while half-asleep, odds are you're not trading well.

Sleep deprivation being the mother of invention, I was driven to find a new forex strategy that would allow me to get a decent night's sleep. The keys to this new strategy were:

(a) Expanding the timeframe I traded in from a few hours to increments of a day or multiple days

(b) Designing market predictions that would trigger trades at hours when I was normally awake - specifically, in the 4:00 pm to 5:00 pm window, Pacific Time.

(c) Investigating automated trading systems such as FX Engines that would enter and exit trades for me no matter what my state of consciousness. I now use FX Engines constantly in combination with strategies (a) and (b).

(d) Limiting the amount of time I spend directly involved with the forex markets: staring at charts, monitoring trades, panicking about my trading strategy, and so on. This helps ensure I don't end up tracking my trades obsessively into the wee hours. (Though as I noted in this post, I'm still not limiting my involvement in as disciplined manner as I should. My trading discipline is still very much a work in progress!)

So if you're facing a choice between sleep and forex, fear not -- you can design a profitable strategy that allows you to have both.

Limiting your emotional exposure to the markets

Lots of advice about the forex markets focuses on how to manage your funds, limit your trading costs, and make careful use of your margin when trading. In fact, my previous post was all about that kind of stuff. And it's important. But equally important to a successful trading career (or hobby) is managing how the market affects your emotions - because it can take quite a toll when things aren't going your way. If forex is seriously affecting your quality of life, you absolutely must reassess how you're approaching the markets.

In my own trading, I've noticed that the negative impact that bad trades have on my emotions and mental outlook tends to be amplified by a set of bad habits. To the extent I can recognize and control these habits, I can limit how emotionally draining a bad week in the forex markets can be.

One of my worst habits is checking on my trades too often. The way I've structured my trading system, I really shouldn't need to check on my trades more than a couple times a day - in fact, I could probably manage with just once a day. But that doesn't stop me from taking a peek dozens of times in a 24 hour period. And there's no point to checking, other than to satisfy my own nagging curiosity, because my system only permits trades to be executed once a day, at a very specific time of day.

Inevitably, when I check in on a trade at a time I really don't need to, it's often not going the way I expected, and I start to get upset. I start to think I need to bail out before it gets even worse. I start thinking in an extremely short-term timeframe completely at odds with my strategy, which seeks gains over months and years of trading. I start to forget that I trade the odds, and there are no 100% odds in forex. I start to question the basic tenets of my trading system. All my trading discipline starts to erode as I begin to second-guess my strategy.

Maybe this sounds familiar. So, you may ask, how can a trader avoid this vicious cycle of checking, doubting, rechecking, doubting some more, and undermining the entire trading system they've put so much work into? The simple answer is to deliberately limit your access to the market. Because looking at it too often can cause serious burnout, as I discussed in this earlier post. Set aside just a few times a day (or whatever period you trade in) when you're allowed to look at your trades. Whenever you're tempted to check in on them outside those times, remind yourself of more productive ways you could be using the time: using historical data to discover new signals, reading about new forex strategies, having a beer outside on the patio, whatever helps divert you from that insidious urge to know exactly what each trade is doing minute by minute. If you can curb that habit and start making better use of all the time you freed up, chances are you'll end up being a much better trader.

Related topics:
The Perils of Chart Burnout
Signs You May Be Overtrading