Beware of the Devil Inside You

Being bad always looks so good...in the beginning!

Yesterday I did something that I haven’t done in a long, long, time…execute impulsive and irrational trades.

For the last few months, I wouldn’t say that I’ve done anything really dumb.  I haven’t traded fantastic, but the ill advised trades that I did take were within acceptable risk limits.

Unfortunately, this was one week that some pent up demons decided to rear their ugly heads and take a big bite out of my trading profits.  I have since figured out the issues that led to this blowup, but more on that later.  Now to the trades…

So my brilliant strategy of the week was to scalp the EURUSD without testing it or having any plan.  The spread was at 0.9 pips so I figured that it couldn’t be hard to take a couple pips here and there.  After all, price only had to move 1 pip in my favor for me to make money, right?!

The Three Trades

So since these were scalp trades, I decided to take 5,000 unit lots instead of my usual max of 500.  That is fine, IF I HAD A TESTED PLAN!  My intention was to play the bounces off the daily pivot points and pick up 2-5 pips here and there.  Here is a play-by-play of the trades I took:

• So I decided to short the EURUSD at a pivot point @ 2935.  The funny thing was that it wasn’t even AT the pivot point, it was a little above.  Then I became the proverbial deer in the headlights.  I told myself that I was only going to risk 8 pips at most.  Well, that turned in to -22 pips before I cried uncle and decided to get out.

• OK, no big deal, I can get it back.  So price rallied and came down so I shorted again @ 2942.  Price kept moving down and I exited @ 2938.  A profit of +4 pips.  Great, I only need 18 more pips.

• Price continued moving down and I shorted again, this time @ 2918.  Then price turned right around and started rallying.  That is when I slapped myself in the face and realized that at that point, I was gambling, so I closed the position @ 2929 for a -11 pip loss and took a walk.

• So all in all, I ended up down -29 pips due to this fiasco.  Not bad for me ordinarily but because the lot sizes were so much bigger, these three trades wiped out all of my winnings from the previous 6 weeks!

So What Went Wrong?

I was really down about the whole thing for a couple of days.  Then I finally received a book that I ordered from Amazon.com last month.  A tip when ordering from vendors other than Amazon.com: they always ship media mail so it takes forever to get to you!

Oddly enough, this otherwise irritating delay in shipping time coincided nicely with my trading blow up.  The book I ordered is Trade With Passion and Purpose: Spiritual, Psychological and Philosophical Keys to Becoming a Top Trader by Mark Whistler.  I will do a full review on this book in another post, but what I read really hit home for me.

The First Cause

Whistler does not mention one indicator or trading strategy in his book.  It is strictly about the psychology.  One key point for me was that we need to truly forgive ourselves for dumb things (trades) we have done and learn from the experience but move on to the next good trade.

I realized that I was beating myself up about the second week in January.  The first week in January was phenomenal, I went 5 for 5 and made 621 pips.  Then the second week was a losing week, down 161 pips.  My goal is to be profitable every week and I felt like I betrayed myself by not having a winning week.

In reviewing my week two trades however, the truth was that I traded pretty well.  Maybe I missed a few cues that would have saved me some pippage, but all-in-all, nothing to be down about.  I had to forgive myself and look on the bright side.

In addition, I actually missed some good trades when my losers gave a signal to go the other way.  But because I had my head down about those trades, I missed out on my opportunity to make my money back and then some.

The Second Cause

I realized that I was tired and frustrated.  Not because of the markets per se, but with my life in general.  I know what kind of life I want to be living but the fact that I’m not there yet coupled with little sleep are a dangerous combination.  The solution, get more sleep before trading, even if it’s just a nap and have faith that if I concentrate, I can live the life I want to have.

The Third Cause

The third demon was a need for action and excitement.  In addition, I have been trading such small dollar amounts that subconsciously I was thinking to myself, is that all I am getting out of all this hard work?!

The solution is to find something new and exciting to try outside of trading so I don’t seek it in trading.  Also, I need to get my account size up so that I feel more like a real trader.

The Fourth Cause

Going back to the book, Whister mentions that we need to have our core reason to be trading.  Without this reason, when we face adversity or have to put in long hours, we will not have a good answer when when we ask ourselves: “For what?”

I wrote down my reasons for trading which I will share in another post because this one is already getting long.

The Fifth Cause

This might sound a little corny but I also have to bolster my self confidence more.  This includes affirmations and other exercises listed in the book.  Part of the reason for the blow up stems from a deep subconscious belief that I don’t deserve success for some reason.  It’s strange how we can be afraid of success sometimes and not even realize it.

Conclusion

So there you have it, a fairly in-depth analysis of what went wrong and my steps to correct it.  I have been avoiding analyzing these trades for about a week but putting all my ideas down in writing like this has been a very cathartic exercise in itself.

So what are some of the reasons YOU take bad trades and what will you do to solve them?  I would love to hear your experiences.  If you made it this far, thanks for bearing with me!

If you enjoyed this article, you might also like:

1. DOH
2. Weekly Forex Trading Review 1/16/09
3. First trade of October 2007
4. The Numbers Are In
5. NZD Trade, Second Trade of the Month