December 5th, 2006

After a losing day I always try to find a way to teach myself a psychological lesson. Perhaps it is a way to justify the expense. Just a visit to a psychologist that happened to last from 9:30 AM until 4:00 PM.

Looking back over the past few years I can categorize my trading losses as resulting from 3 distinct causes. The first, and the one most prevalent in the beginning of my trading career, was simply not knowing what I was doing—reading a trading book—probably not all of the book, but the juicy part that gives the author’s “secret” and a great looking chart with those wonderful 2 arrows in it. You know: “Buy Here!” and “Sell Here!” And for some reason they were always at both ends of the chart, usually the buy was right at the bottom and the sell right at the top. The key to riches was to just add the dollar amount per point and multiply it by how many points I was going to make on the next trade, using the “secret” method, times how many contracts I was going to trade. I never asked how this secret stayed a secret when the jacket of the book always stated that this book was number 3 on the NY Times best seller list. Just like all the supermarket magazines that display the “50 Secrets to pleasing your mate” on the front cover. The last time I opened that magazine, the first secret said, “Don’t trade futures, especially blindly following the last trading book you read.”

After a couple of years or so discovering all the secret trading ideas in the world I actually started retaining a few ideas that seemed to give me a decent return before the inevitable drawdown. So in reality the losses that happened when following some sound method were just the normal market behavior that tends to make any method unprofitable for some period of time. Those losses were actually normal and should have been anticipated and actually welcomed.

The losses should have been welcomed because I should have felt good about having enough discipline in myself and trust in a viable method to follow the rules. I am sure you know that is not what happened.

What happened is the third way I lost. The worst reasons. I needed a reason for the losses—one to put a face on it. I blamed the “smart money,” the people who knew where my stops were. I blamed the trading platform—If I got my fill faster that would have stopped the market from going down. Huh? I blamed the designers of the systems. They probably sold so many copies that it affected the profitability of the system. I can’t wait until we have 30,000 members in this room and then we can rule the markets. Sounds like a James Bond villain. Gold Scalper! Finally I blamed myself. This is the punishment I get for not having a real job, like in the movie Wall Street where Bud Fox’s father tells Bud to get a real job, be a supervisor at Blue Star Airlines.

When I followed some guru who made 8,000% a year and never lost, I blamed myself for bringing bad luck. Every time it seemed the guru began to lose money when I was present—had to be me.

So what do we do when our method takes a loss? We step in with research. We attempt to find a pattern to the losses. We don’t really go back too much in time. We sort of limit ourselves to the last couple of trades. Why do we do that? Probably out of pride. If our method was a counter trend trade we want to show all those successful trend traders how at the moment we get in the market will reverse. Imagine if we could take money away from the best traders in the world and buy right at the bottom or short right at the top. And if we get stopped out it just means that we still have a chance to get revenge on the traders who dared take our money. We can wait five minutes and just try to pick the trend change again. Of course we will need a little more of a correct move to make up for the last loss. So instead of being happy with a ten point trade, we will be sure to wait for 20 points. Or just double the number of contracts. And even if we are stopped out again, we can repeat the process. Our just not use a stupid stop. A loss is only a loss when we decide to take it. And damn it, just don’t take it.

If our method or a room call takes a couple of losses perhaps we can even profit from that knowledge. We can stop taking the next couple of trades, especially if we feel the trade may not work. And after a few trades do work, even though we might get upset for not being in those trades, we can then obviously see that the calls and methods have returned to profitability and jump in on the next few signals. OOOOPS. A few losses after we jumped in. No problem. Must be a losing period so avoid the next 3 trades. Maybe even take the opposite position.

Without knowing it we have reverted back to stage one.

The only way I turned myself around was by developing a sense of what some philosophers in the sixties termed an “Existentialistic” viewpoint. I am not sure if Sartre would have been a good trader but at least the helpless feeling of the nihilists would tell us there is nothing we can do to determine where the market is heading in the next 5 minutes. Only a very fast George Gallup who could poll all the market participants over the next few minutes would have an idea of what the market might do. We can only deal in tendencies.

So my advice is not to take revenge on yourself, the markets, or the dog. Don’t second guess your methods, the guru, or the last career choice you made. Forget back testing and curve fitting. Test out the theory in the plain light of real time trading in the here and now. If you have no idea of how markets behave follow them in a simulator for a few weeks. Then go to real cash on 1 contract for another few weeks. Then if things look good—GET SERIOUS.

GREAT TRADING AHEAD!

Alex L. Wasilewski

TTW Sr. Trader