Lessons from the Hard Right Edge

With 8000 hours of study and practice under my belt at the end of 2010, I share here some major lessons my personal experience has taught me:

“The conversion happens when you truly believe the future is not knowable. Start thinking you know the outcome and you have already slipped.” - gov

“Anything can happen.” - Mark Douglas

No matter how many times a specific setup produces a specific result, next time could be different.

Practice proper position size, account protection and safe exits until they’re as instinctive as looking both ways before crossing the street. The one time you believe you don’t need leverage constraints, or a protective stop, or an exit plan because a setup is just way too good may turn out to be the time you needed it more than ever.

If you trade off a strong opinion rather than price action and place a disaster stop at a place you believe price will never go, price will very likely go there, stop you out, then reverse not far from that level.

“All good is hard. All evil is easy. Dying, losing, cheating, and mediocrity is easy. Stay away from easy.” - Scott Alexander

The market rewards what is difficult.

Have you ever hesitated to put on a trade only to watch price run hugely in your favor without you? Maybe it was buying a new high or selling a new low during a strong trend, because what if the breakout fails? Maybe it was buying a pullback in an uptrend or selling a pullback in a downtrend because even though you’ve been taught the trend is your friend, how do you know it’s not a reversal?

Have you ever taken a very large capitulation loss because you had difficulty taking a small loss?

Do you ever put on a trade that immediately runs in your favor with no heat, and you grab a quick profit or quickly move your stop break even, yet never consider exiting a trade early that runs against you as soon you enter?

Do you add to losers, yet never add to winners?

Cheating is also easy because it caters to your ego, your desire to get the best deal or to be right no matter what. You’re waiting impatiently for a setup to confirm an entry and you’re so certain you know what price will do next, that you cheat and enter early to get a better price because you want to capture more of the move you’re so sure of, only to end up in a losing trade because you didn’t wait for confirmation of the move.

Or you’re stopped out of several trades in a row near pivot points during choppy low volume range action (where it feels easier to trade, but isn’t) and decide “Screw it! I’m not using stops because the market isn’t gonna make a fool of me anymore, I KNOW price is gonna [crash/rally]…” and suddenly price breaks out against you and you’re a deer in the headlights without a plan, and end up bailing at the worst possible moment.

Once you identify an edge and set rules for risk management that keeps the edge in your favor, successful trading is based on trading each appearance of your setups, despite what your opinion may be at the time.

“Hmmm, there’s a short signal, but the news was so bullish I don’t think it’s a good idea…”

“This is definitely a long signal, but it already ran 245 ticks off the low and can’t possibly go much higher this late in the session…”

In a game of odds, it’s important to participate in every game.

“…free yourself of the ego…” - ammo

Nothing feeds the ego like a long string of successful trades, or an unbroken run of winning days, or finding a trading formula that gives you the illusion you’re a genius who’s outsmarted the dumb market.

And nothing leads to financial disaster more quickly than overconfidence or the strong opinion that you know more than all the market participants who are driving price in a given direction.

The ego can become a financially fatal trap, especially for the new inexperienced trader who experiences early success.

EricP tells it like it is:

“A successful trader is humble, not egotistical. The trader that knows it all, will typically quickly be proven wrong by the market. The humble attitude leads a trader to be willing to admit mistakes quickly, close out losing trades, and move on without loss of confidence.

An egotistical trader is more likely to argue with the markets, potentially leading to huge losing days or possible account blow-outs. You don't need to win on every trade, or even every trading day, or every trading week.

A humble trader is able to admit that his trading is creating nothing but losses that day, and stop trading until the markets are better suited to his/her style. A humble trader is less likely to double-up into excessively risky trades, in order to 'get back even' on the trade or on the day. A humble trader has nothing to prove, to anyone, and can freely admit mistakes to themself and others, enabling them to quickly and easily react to what the market is telling them, with little regard for it's contradiction to what he/she may have expected only minutes earlier.

Conversely, and egotistical trader might confidently tell his friends 'what is going to happen' and is unwilling or unable to subsequently change his mind when the market tells him otherwise. Once he's made a public proclamation, he can't go back on his 'call' or he might appear to be wrong.

The successful trader can't tie up their self image or self worth on a single trade, or a single trading day. Keeping your attitude humble enables you to simply treat each and every trade as individually irrelevant, and allows you to focus on doing what's right, and not being right.”

I’ll close with the questions I ask myself about each trade at the end of the day:

1. Was it a valid setup?

2. Did I wait for confirmation of the setup and follow my rules for entry?

3. Did I implement my risk management plan?

4. Did I manage the trade according to my rules, taking profits at or beyond the initial target, never earlier unless a valid stop-and-reverse signal appeared?

There are many books on short term trading (and several threads on ET) that will provide you with a valid edge and risk management rules. Anyone who can read, identify common patterns, and follow basic rules for entering a position should be able to trade successfully.

If, however, your ego is attached to your P/L, if your trading is driven by fear or greed, if you believe you can control the supply/demand imbalance that drives price *, you can be handed a Holy Grail of Trading and it will be as useful to you as a chocolate teapot.

* OK, maybe Red_Ink can.

 

I like your 4 rules.
Thank you.

 

A heart-felt, well thought out post. With many excellent points for the beginner. So I will be gentle. You are no longer a beginner. I think you worry too much about the psychological aspect and not enough about the statistical aspect. A robust semi-stationary system eliminates most psychological issues. Bear down on rigorous system development. Become a trading robot during market hours and you can be a total nutcase the rest of the time. I am your witness in this.

 

This one I understand and I can confirm the statements made in this post I quoted below...☺

ES

P. S. Nd..This one is a keeper: “All good is hard. All evil is easy. Dying, losing, cheating, and mediocrity is easy. Stay away from easy.”

 

Hey, I always appreciate your posts especially, as they come directly from your own personal experience. And in addition to being very observant, you do a great job of articulating what you've learned and what is important and not important. And you don't even flinch at admitting when you've made a mistake. The lessons the market has to teach are applicable to everyone. Thanks for taking the time to share all that you do, not only in this post but in all of your posts.

Happy New Year!

Best,
B

__________________
We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time
- T.S. Eliot -

 

Thanks NoDoji. Your insights are always helpful.

 

Very nice NoDoji, very nice indeed. I see you're still working on chapters for your book . I agree with the Love Doctor, "You are no longer a beginner." I'm somewhat surprised at the legibility of his post so soon after New Years Eve, maybe it's a resolution . I believe the simplest rules have a greater chance of making their way through my thick skull and into my cluttered brain. As you said, "With 8000 hours of study and practice under my belt at the end of 2010, I share here some major lessons my personal experience has taught me:" It's mind boggling to me to think that after 8000 hrs you/ME/we still ask yourselves at he end of the day,,,, Did I follow my rules?

When I was first leaning how to maneuver a boat near a dock, my instructor/teacher said, "only approach a dock at the speed you are willing to, run into it at! I doubt I have 8000 hrs at the helm, but I never questioned that "rule," or tried to second guess it, ever. Funny how trading rules take so long to, first qualify in our/my mind as a rule, and then be implemented as a rule.

I immediately wrote this quote, in my book of daily knowledge:
"as useful to you as a chocolate teapot."

Again very nice, and thank you

 

Happy new year Mrs. Doji that isnt

Great post as per usual..

 

More mind-boggling is the number of times I still answer: "No." :eek:

Fortunately, most of time I don't follow my rules these days mainly pertains to letting winners run when it's clear the market is pretty much throwing money at me.

Much like the dangers of cigarette smoking, the dangers of reckless trading may not cause extreme injury for quite some time.

If we experienced severe physical pain every time we violated a core trading rule, we'd be quicker to implement them without fail.

Here's one benefit of having my face slammed into the sidewalk enough times: My max loss on a trade is now $150 per lot traded and my protective stop goes in immediately upon fill.

And for this, thank you!

 

Isn't that the truth! I've violated that rule a couple times much to my embarrassment.