Saturday, September 23, 2006

Dealing with a red day

Yesterday I had a very deep red day after 2 weeks of green ones and all the feelings of

  • am I able to trade
  • is my system sound
  • why am I such a mooron
  • can’t I recognize a trend, when I see one
  • is my good fortune over and the swing down starts again

were back.

Ignoring these feelings will led to them being fullfilled. You need to deal with these thoughts to reach an emotional neutral state again. But how?

Negating them, telling you, your system is sound, you can trade won’t help. It’s too easy to say so and the one you have to convince is

You yourself

So you know, that it’s just a saying and you are just trying to convince you, that the feelings are not valid.

You need to do more.

The first step I have already taken by writing this article, by writing about my feelings, as this forces them to light so I can deal with them, instead of having them linger in the background of my mind doing their subversive work, which would destroy all I have build so far.

Next comes a mind-playback of the trades to relive the feelings in the trades, which went wrong. Was there something in common?

The first was a HSI trade. I went short and was totally convinced the trade would eventually be a winner. It lingered around my entry for 10 or 15 minutes, going a few points up, then down, then up again. I saw selling in the contract, HSI had not followed the US markets down, so I thought it would eventually and became complacent, when suddenly HSI squeezed up and hit my disaster Stop.

Shit, it happens in HSI and I told ‘em HongKong traders names. It helps to vent your feelings if something went wrong to regain composure, to regain an emotional neutral state.

But besides going against me this trade shattered my downward bias I had had for the day. And this was the real error I made yesterday. After seeing HSI squeeze 100 points up after a strong down day in the US, I traded the european markets with the same bias. I traded to the long side waiting for a squeeze to happen, which never came. Instead I was stopped out twice on DAX and twice on FTSE, before I realized my error. 5 red trades in a row. It was a long time that that happened to me and it was a very costly error, as I give the Dax and FTSE 20 ticks Stops.

The Stopsize is not the problem, not being able to switch back to my shattered trading plan was. My charts told me go short, priceaction told me to go short, but instead I waited for a squeeze which never materialized. Had I traded the long side as countertrend trades, I would have waited for a support to be hit and entered within 1 point of it. but something held me back. Only when I saw DAX going 5 points or more I took the long side, seeing it as sign, that the european markets took the lead from HSI and would trade to the upside. 1 or max 2 points green and then the sledgehammer was there again driving DAX and FTSE down.

About 1400$ down in 5 trades on 1 contract after 1 hour of trading was sure a hit to my confidence.

I took a deep breath, stopped looking for a trade and stepped back from the screen.

What had I done wrong?

I had been too confident about the HSI trade. I had been proven wrong and therefore the short side, which had failed in the HSI, must be the wrong side for the european market as well.

Even after I had recognized this false conclusion, I wasn’t able to switch back to the short side. The first trade still lingered in the back of my mind, asking questions like: Chris, what will you do, when you are again caught in such a squeeze. Will you be able to pull the plug? Are you prepared for another defeat? So I traded without confidence and therefore late on the long side. And for this I paid.

To stop trading wasn’t an answer either. I’ve done that, been done that road and it usually lead to strings of red days, as I then question my trading, my signals more and more. The last year gave me confidence. I see the trades, I can trade. So I did, what I usually do, when I get no clue on a market.

I looked at a different market. Natural Gas was even more erratic than usual, so I looked at the Gold market. ZG provided a good setup and I made the first 300$ back. Another one brought  the balance down to -900$.

In the meantime it was afternoon and Dax had broken further down. I took it short, got caught in a reversal, as one would expect after Dax was already down 80 points for the day, reversed after -10 ticks and was out +10 ticks on the long side, bringing the balance back to neutral.

Another 2 Gold trades were stopped at Breakeven +1. And while being down huge in the first hour of trading was no reason to stop trading, as string of Breakeven trades in the late afternoon (usually around 5 to 6 pm my time, which is noon in New York) is a sure sign, that I’m done for the day. And I have come to respect that sign.

So I closed the day deep red with the knowledge, that the week was still green, that I was still able to concentrate, to pull the trigger and take good trades after a string of real bad trades. I got 1/3rd of my morning loss back, and had I been really fit in the afternoon, I could have made it all back in a Short Dax or Short Gold trade, which both ran about 40 ticks after I got the signal.

I did not take the trades, but I saw them and hesitated. Something to work on and a lot more productive, than thinking about the losing trades. Still writing this lengthy article has brought some closure, has brought some understanding to the why it happened, so I will not again fall into this trap, but recognise it right away and profit from it.