I have a confession to make: I lost $547 in the market yesterday. I let a nice winner turn into a loser. The pain of the loss is irritating, and I’m a bit ashamed about it, but the more important question is whether I learned anything about myself from the tuition I paid to the School of Hard Knocks.
This particular mistake might not be a mistake you yourself would be likely to make. I’m a trading coach and a semi-professional pundit, so it’s natural for me to think I know what I’m doing and I have a pretty good idea of what’s going to happen. But this tendency to ‘think I know’ can definitely get me in trouble.
(Take a moment to assess whether you fall into the same trap now and then.)
In my trading, I enter based on a few technical setups. My setups are well-defined and they stand out clearly, so I’m pretty good about waiting for the right moment. And I’m disciplined about setting and respecting stops at the start of the trade.
At this stage of my development as a trader, my challenge is managing winners. I was up 15 points in the Nasdaq futures and feeling rather smug. My view of Wednesday as being a likely break-out day was being validated during the morning session as every minor dip was bought. (“Damn, I’m good.”)
The market’s behavior so beautifully reinforced my bias that I did not place a trailing stop to protect my gains. Rather, I was thinking about holding for a few days and bagging a 100-point move. Accordingly, I talked myself into complacency, and as the afternoon selling progressed I was very slowly and painfully disillusioned.
Losses hurt, but trading-not-to-lose is a psychological trap. It arises from an excessive focus on “the money” and usually is accompanied by an insufficient focus on one’s method. So that’s not the answer.
For me, the answer is to always remember that I don’t know much. That anything can happen. The market’s behavior always seems clear in hindsight, but my job as a trader is to get ever more comfortable with uncertainty.
