Lessons I've learned from trading poorly

I’ve had some magic runs over my trading career where my days without loss has gone on for weeks and weeks. Inevitably though the run ends and a loss is made. On rare occasions, the losses multiply, and sometimes I’ve been in such a funk I’ve bought the high and sold the low on a run or on a day.

In the end, you often learn more from your losses than from your wins as a trader. But I know from the experience of others that if I hadn’t been careful these runs can morph into a crisis of confidence, of more losses, capital destruction, and abandonment of trading.

In this column, I want to address what I’ve done to recover from my funks, and what other traders I know have done over the years.  

Trading is a business, or it should be treated like one.

But in many ways trading is also like sport. Or at least it is for me.

Each time I enter the park (or place a trade) I’m  playing to win (be profitable). But it doesn’t always work out that way.  I can’t control the opposition (the market, or price action), sometimes the ball bounces the wrong way (stopped out), errors are made, or me and/or my team mates just might have a bad day (miss a trade).

The positive expectancy I had of myself and my performance just didn’t work out.

“Stuff happens” as they say.

And because “stuff happens” each encounter is viewed as a discrete event and the next one - match, or trade - is faced with the same positive expectancy as the last match – even though the previous outing may have been a loss.

But, what if, like my NRL and AFL teams - the Canterbury Bulldogs and Collingwood Magpies this year - that hoped for promise turns into a run of losses that cruels the season. What do you do as a fan, as the coach (or trader).

Rebuild of course, focus on the year ahead.

So it is with trading when a trader gets in a rut 

As I noted at the outset I haven’t had a lot of bad periods over my career. I guess I’ve been lucky and that’s contributed to me hanging around for close to 30 years now.

But I’ve had some shockers.

Like the time I was limit short interest rates and the RBA cut the cash rate. I lost more money in the seconds that followed that announcement than on any other day in my career.  Or the time my trading got so bad that I was constantly buying the high and selling the low – at least for a few days.

Like a footy team on a bad run, these were confidence sapping events that could easily have spiralled out of control.

Here’s two things I did – and I know other seasoned traders have done - to arrest my decline and get back to profitable trading.

  1. I tried to understand where I was going wrong.

These days this step is pretty easy because I have a systematic execution process and a trade journal. Because of this a bad trade is not a losing trade, it is a trade not executed along the lines of my system, risk, and money management protocols.

But in the past – before this transition to a more professional approach – it was harder to determine why the loss happened.

Why had I gotten things so wrong with the RBA, how did I get into the spiral of buy the high and sell the low on numerous days?

Easy, in the case of the RBA move I was a pig headed fool who thought I knew more than the markets. And in the case of getting chopped daily it was that I was trading scared. That is my position sizing was off and the risk I was taking was too big. So I watched every tick, fretted over every move against my position, celebrated every move in the right direction. It was emotionally and physically exhausting and it was because when I was trading too big I couldn’t really afford to lose.   

So, what’d I do?

I realised I don’t know everything. And from that day in July 1996 I’ve been a much better trader – I reckon I owe Bernie Fraser a beer. And in terms of trading scared I took a step back, a break, and reconsidered my approach.

  1. That brings me to the second thing I often do when I am having a bad run - I cut my position sizing on my trading.

These days I have a fixed fraction of assets (dollars in my trading account) as part of my position sizing for trades. But even then there is a scale within which I move the position size.

So it was in the past that after a break from trading  – if things were that bad, or run long enough to need a break – the advice I was given by a couple of important mentors early in my trading career was to scale back in using smaller position sizes. Maybe 25% of my usual size to get back into trading.

Why was it suggested to me to do this? My mentors said in their experience, and in working with others, they found that a much smaller than usual position size meant traders felt less risk and so didn’t ride every tick up and down.

I found the same and it worked for me.

As the years have progressed I’ve become much more systematic. I have one strategy, process, that I use for all markets and in all time frames. It works and I don’t argue with it. And I don’t pre-empt it.

But trading is a journey, and education, and for me it’s just like sport.

We learn by acquiring knowledge, we then apply that knowledge to practice, and eventually we take that practice onto the field. Whether it’s League, AFL, Football, or surfing no one is an instant expert and we all have periods where things go wrong and our resolve is tested.

As Calvin Coolidge, the 30th president of the United States, once said, “nothing in the world can take the place of persistence”. These two strategies – handed to me by experienced mentors – helped me have the necessary persistence to press on toward success in my trading.

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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