Thursday, March 01, 2007

Review of February

Could have been a google times better, but fortunately, it wasn't a lot worse.

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I made $2136 for the month of February, but had almost that amount in costly mistakes.
If I made fewer mistakes, I could have avoided up to $1931 in losses. That's frustrating to know. Not the kind of frustration that leaves you not knowing what to do, but the kind of frustration that just makes you annoyed, and leaves you thirsting to do even better on the "second chance". I feel like I need to redeem myself. I can't go on making these mistakes, it's just too costly and painful. I can't even believe that I have such a high threshold for pain.

It's been two months already, but I haven't made any visible signs of improving my performance in terms of mistake free trading. Sure, everyone says don't be so hard on yourself. Well, my thought is that there's a lot of things about the market that I cannot control, but I can control the mistakes that I make. That $1931 in mistakes did not have to happen, at least not all of it.

So how do I work on decreasing the mistakes that I make, but without dwelling on them too much? What a fine line to walk. What would the Highly Effective Trader do? He would focus on the setup. So perhaps that's what I should start doing, grading the setup like how TraderX does. If the setup doesn't have at least a greater than 50% probability of winning, or if there's a greater than 50% probability of my stop getting hit, then why am I even considering the trade ?
The next trade is not about the pressure to perform, it's not about the fear of protecting profits, it's not about my own unrealistic expectations, it's all about the setup, pure and simple. The trading plan should be centred around taking setups that have at least a 50.1% chance of winning, and less than 49.9% chance of the stop getting hit.


Caravaggio said...

Hey Phileo. That's not a bad number in the grand scheme of things. When it comes to the giving back of profits, it can be hard to really know how much was due to ineptitude ... I know it feels bad when you give p+l back but I wouldn't blame yourself to hard unless you can really be sure you were to blame.

I think your last point about a trade having at least a 50.1% chance of success is a good one, but I wouldn't focus on the probability as much as the overall expected value (probability x payoff) - if a trade in an instrument has only a perceived chance of success of even 30%, this may be worth it if the potential payoff is massive. With hindsight, a good example is Apple. About 5 years ago, it was trading close to its cash value per share, and so it had very little downside risk, but the upside...well, you can see that now. At the time, even if you thought the chances of a win were 50/50, once you factor in the potential payoff, it becomes worthwhile. I know this sounds like a one-off case, but I think it pays to consider the reward on offer on each trade as well as the probability of achieving it. I'm sure lots of strategies succeed with more than 50% losers, but they do it by catching those few home runs. Just thoughts, and all the best for March.

Phileo said...

Hi Caravaggio,

I understand what you are saying about overall EV = (Probability x Payoff size) for a given trade. IMO, the more important of the two factors is Probability, because it gives the payoff size some meaning and context. A 20% payoff that has only a 25% chance of succeeding would be played differently from a 5% payoff that has a 75% chance of succeeding.
I guess what you're saying is that the 20% payoff that has only a 25% chance of succeeding is a valid play so long as your position sizing is appropriate and your trading system is designed to make such plays.
My preference is always for the high probability trade, I feel it's better for my psyche!

Caravaggio said...

I hear you about the >50% being good for the psyche. It's kind of how I feel as well, even though the rational side of me says I shouldn't place much store in the metric.