10 questions to ask yourself if you are holding a ginormous losing position and don’t know what to do

In the unfortunate case that you are holding a massive losing position in your portfolio and don’t know what to do, the first step to fight back is to reassess the situation with a rational, unbiased mind. Easier said than done. But that is what I learned the hard way a few years back when I bankrupted my trading account in a single stock. I waited for weeks and then months. While checking online forums for discussions on the stock, eager for others to fuel my hope. Hopes for the stock to come back to some better price so that I can unload. 3 years later, the company’s stock price is still screeching along the zero mark.

While I’d like to think that I have come a long way since then, there is no guarantee that I won’t find myself in that situation again. As such, I developed a self-assessment questionnaire with questions that needed to be asked in a crisis. But often not because people are always too emotionally caught up. It is like an emergency checklist for the emergency.

Here are my 10 questions to ask yourself when nothing is left but false hope in a dire trading position:

1. What is your current account drawdown compared to your previous performance?
2. How proven is your trading system?
3. Are your reasons for entering this position still valid?
4. Is the reason for letting the trade breakaway from you within your trading strategy?
5. What are the emotional reasons to hold this trade?
6. What are the logical reasons to hold this trade?
7. What are the emotional reasons to exit this trade?
8. What are the logical reasons to exit this trade?
9. What can you do to reduce your overall risk?
10. And last but not least, WHAT IF the price breaks against your trade even further?

In any case, once the crisis is over, it is time to reflect and review what went wrong to prevent this from happening again. After all, at least make something out of this by learning and improving. And if you can, please share with us your learning experience in the comments below to help other readers.

“There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!”

Reminiscences of a Stock Operator, by Edwin Lefèvre

Focusing on trading my timeframe to reduce over-trading

In my last month’s performance review, I said that one of my goals for this month is to think more and trade less. But in my first week of December, I have racked up 53 trades already… Average for October (a normal month) was only 34, for the entire month. Now that we’re in the second week, I can clearly see my over-trading problem from my trading log and say to myself that enough is enough.

In terms of my account balance, I’m experiencing a 1% drawdown because of these “testing-the-water” trades. They are small positions that I micro-manage to minimize the exposed risks by moving the stops every so often. But the facts speak for itself, 53 trades in the first week, 23 winning trades (acceptable), 1 % drawdown (bad). The problem with this hit and miss approach is that it is taking too much of my time with no result to show. It’s true that a single week makes no difference in the long run. But this just isn’t my style of trading. It doesn’t fit with my trading strategy. This is over-trading.

Why do people over-trade? Lack of discipline. Desire to catch major moves. Afraid to miss a run. Addiction. Boredom. and so on.

Over-trading has been a major problem for me back in the days when I tried day trading index futures. I haven’t had this problem for a couple of years now. Which is great. But this bad habit is creeping back up on me. This time, it’s because I am staring at the trading screen too much once I am in a position and tried to micro-manage my trades to minimize my risk. This obsession with tightening my stops backfired and I took more trades because of it and get stopped out more often before any sizable move can materialize. A lose-lose situation.

Since realizing that my arch-nemesis is back in business, finding a solution to restrain myself is simple. I studied my trading journal in the past few weeks to review my best trades. The solution to improve my performance and restrain myself from over-trading is actually both sides of the same coin. I just need to focus on trading my best timeframe.

What do I really mean by that? Different players and factors affect different timeframes in the markets. Thus, prices behave differently in different timeframes. Dr. Steenbarger has an excellent post titled Lessons for Developing Traders: More on What Moves Markets which talks about how different market participants affects the way market’s flow in different time frames. He uses the analogy of visualizing the markets as an ocean. Global climate affects the flow of waves across the ocean. At the same time, kids splashing at a beach can also create ripples to these waves. Obviously, one is a macro-phenomenon and the other is a localized event. Similarly, central banks and institutions are what powers the long term trend of a market. But market makers and retail traders can create ripples in the short term. What works for one timeframe might not work for another.

My trading style has always been geared toward riding the bigger waves, e.g. my FTC setup. So if I become affixiated with what’s happening with the short-term ripples, it would not only cause me to over-trade but also affect my long-term strategy too. As such, here is what I will do.

1. Focus on analysis from the weekly and daily charts.
2. Determine trading setup only from daily and 3 hour charts.
3. Time my entries and exits from the 3 hour chart.
4. Execute my trade orders on the 30 minute chart and for short-term confirmation.
5. Use the 1 hour chart if necessary to scaling in or out a position.
6. Never enter or exit a trade based on the 30 min. chart (or anything less) alone.

Actually, I have started following this process this week already and it seems to be working well. I will review my performance at the end of the month as usual to see how this goes.

An example of how trading in fear is bad for your account

Having had a hard time day trading the EUR/USD last week, things haven’t been well for me this week either with the market in a gridlock. My one and only viable setup so far is built for a trending market. So this range-bound market is new territory for me as I experiment (in hindsight, haphazardly) to come up with more profitable forex trading setups. As you can imagine, trading without discipline is a recipe for diaster.

I have given back all the paper gain from this month by the start of this week and is treading on thin ice with my demo account dipping dangerously close to the November opening balance. Needless to say, I do not want to see my account in the red for this month.

But that is what happened after today’s string of failed trades. I am officially in the red for this month, for now. While there are several mistakes I made resulting in this mess, I think it all boils down to one flaw in my trading this week. Yes, those day trading stints I did surely have put a dent in my demo account, but what’s worse is that I’ve unconsciously have let those losses affect my trading mentality.

These losses were stuck in my mind and my mental “goal” for this week was recovering from them. However, I have approached the problem in the wrong way by not wanting to lose anymore in my account. In other words, I was afraid of losing.

So how did that materially affect my trading? Here is a simple example as illustrated in my order history on the GBP/JPY chart attached at the bottom of this post. The 3 yellow triangles are my short entries and the 3 red dots marks the stopped exits.

According to my setup, my original entry at 149.50 had a stop at 150.50. But I moved my stop closer to 149.80 in the morning because I didn’t want to risk more. That got taken out easily as 149.80 is within the congestion zone. Then I tried to short it a couple more times with tight stops because I see the downside potential to be still intact. Those were eaten up alive too and now I don’t have a position because it would have been more foolish to keep trying in vain.

While just 3 trades wouldn’t have done much damage, I was doing the same thing across the board in shorting CAD/JPY and EUR/CAD. A few here and a few there. They add up to a bad day.

As of this writing, it looks like these pairs are finally moving in my direction. But instead of being patient with reasonable stops, I thought I could do better and micro-managed my positions to end up taking multiple small losses and with nothing left on the table to ride the move.

So what is the correct way of following up on a dent in the account? I should have done the following instead:

1. Reduce risk exposure by limiting trade size or overall opened positions until I am back up.
2. Focus on what I did wrong last week and stop doing that, i.e. no more day trading.
3. Recall my best trades and do more of that, i.e. my one and only finalized setup, FTC.

Not so coincidentally, now that I’m in the deepest drawdown ever, this is as good as ever to put this emergency recovery procedure into practice.

GBP/JPY, 1-hour

How to Draft Your Own 3 Rules of Trading

If you decide to write your own trading rules. Here’s an explanation of how I came about my 3 trading rules and the reasoning behind them.

So why only 3 trading rules? There are several reasons for it.

1. Easy to remember.
2. Easy to follow.
3. Easy to learn.

As I’ve said in my 3 rules page, this list is not intended to be written in stone. You are expected to progress from being restrained by it, to being familiar with it, and then to being habitual with it. Thus, a short list makes it easy to remember, to follow, and to learn. Once any rule become an unconscious competency, you will not need it anymore and it can be adapted or changed to address your new needs.

Besides the benefit of keeping it short, there’s another reason why I’m using 3 rules. The three rules actually address my biggest trading weaknesses in the past, present, and future. This is also the answer to this post’s title, how to draft your own 3 rules of trading.

Let’s get right to it.

The first rule is to tackle my archilles’ heel, the bane of my trading, based on my trading history. It is the single most important thing that when I looked back and analysed my trades in the past few months, or even years, which would have made my trading better. It could be a trading strategy tweak, a trading psychology note-to-self, or a risk management rule. Anything goes. And if that didn’t really help, consider using a popular hypothetical scenario, if you can go back in time, what would you have told yourself back then to improve your trading?

The second rule is derived from asking the question, what is the most important thing that I can do now with all of my trades to increase my odds in this game? Let’s use a hypothetical again. Imagine that there is a trading guru here trading with you now and watching you trade, what would s/he tell you?

The last rule is to address the future. What can you do in the times to come that can make the most difference in your trading? What is this next step you can take that will start the wheel going on your journey to becoming the trader that you want to be?

Whatever your trading rules are, the most important rule about drafting your own trading rules is to be as specific as you can. Vague or unclear rules are worse than useless because they can give a false sense of security. Consider these three #3 rules about the same idea.

I want to …

1. Improve on my trades.
2. Improve on my trades by studying my trading history.
3. Improve on my trades by studying any trade with performance statistics beyond the middle 50% quartile.

I’ll let you be the judge on which style you prefer.

If you didn’t read any of the above, remember this, the most important rule (yes, I lied above) for drafting your trading rules is to just write them down and follow them. No matter what you wrote, you will eventually find ways to improve on it if you are diligent about them. So just start somewhere and go with it.

Passing Japan’s hardest test: If there is a certifying exam for trading, this would be like it

I started watching this video (attached below) merely out of curiosity. Just to see what test in Japan is harder than becoming a lawyer or a surgeon. But as I was watching it, the parallel of their recurring theme on the goal of Kendo, which is to defeat yourself, rather than your opponent, is strikingly similar to what I’ve been trying to accomplish in trading.

The video follows two 8th dan Kendo test candidates, Ishida Kenichi, a National Kendo Champion 15 years ago (whom have failed this test 4 times since), and Kai Miyamoto, a 78-year-old that has tried this test for 24 times in 24 consecutive years and failing every time.

Watch the hour long video and take from it what you can yourself. Here are a couple of quotes as teasers.

“Mr. Ishida trains to teach his body not accidental swings, but only perfectly calculated and timed movements.” (flip through any trading psychology book and I’m sure you’ll find similar words)

Toward the end of the video, Ishida had to write an essay on the topic of “The Sword is Soul”. The translator summarized Ishida’s essay as follows.

“The most important aspect of Kendo is to have a humble enough mind to admit that you are weak and train to improve yourself.”

Replace the word “Kendo” with “trading” and there you have it. A seemingly trite statement, but only when you are able to appreciate the simplicity and truth of such words by a former Japanese National Kendo Champion can you begin to truly learn, rather be it Kendo or trading.