Sunday, April 20, 2008

Becoming Your Own Trading Coach: A Case Study

Yo, check it out, as Randy Jackson would say:

A young, developing trader emails me about his performance on Friday. The market gapped open strongly to the upside and he immediately found lagging stocks to short. I can only guess that his reasoning was based on the supposition that "gaps tend to fill", so that he'd benefit when the weakest of the stocks retreat with the broad market.

Lost, of course, was the fact that this was a very large upside gap, very broadly distributed across a range of sectors and issues. If our young trader had actually made a historical study of such very strong opens, he might have been less inclined to swim against the tide. And that 's not even taking into consideration that the market was breaking out of a long-term zone of price resistance.

So, OK, the young trader begins his day on a boneheaded note, at least in my book. His shorts start out profitable and then give back their gains, presumably as the broad market is roaring ahead. What happens now?

This is where our young, developing trader shows that he will someday be an old, experienced trader. He describes a rule he had set for himself, "If a position immediately went against me, if after one hour it was still a loser and not yet at my loss goal, then I would get out and move to the next trade." In other words, he doesn't wait for the position to put him deeply under water and he doesn't fight the market and add to his position out of frustration. He just moves on to the next trade.

But, as Randy would say, this is where our trader is hot: His "next trade" involved buying calls. Our young, developing trader flipped his position and aligned himself with the market direction. He took the time to reassess and then found opportunity based on what the market was doing, not based on what he thought the market *should* do. By 9 AM, he had turned his head around, setting up a profitable and successful trading day.

Compare our young trader with others who wrote to me after fading the market all day Friday. Their refrain was that the market *shouldn't* be rallying because economic fundamentals are so bad, earnings are so weak, etc. They were so locked into their opinions and scenarios that they couldn't see the lopsided nature of the day's trade.

Hey, we're all going to lose forest for trees and make some boneheaded calls. I could regale you with dozens of my own. What sets apart the traders with longevity is the ability to quickly recognize these mistakes and make mid-course corrections.

To have a strong enough ego to aggressively take on risk when you feel conviction about an idea, but also to have enough lack of ego to let go of those ideas when they're not working: that's a huge part of success and the mindset of an expert trader.

Oh, and by the way, our young trader concluded the email by emphasizing other mistakes he had made and wanted to work on next week. He's only been a trader for a few months and already he's coaching himself and preparing to put me out of a job.

I love that kind of unemployment. It keeps me well employed.


Becoming Your Own Trading Coach

Letting Profits Run by Coaching Yourself

Programming Your Experience as a Trader


Trader M.D. said...

Another excellent post.

I had 2 great days this week. Thanks to your posts on trend days and a combination of my realizing that I was trying to fight the trend on some of those trend days. In addition I've been reading the tape more and taking a look at the market reaction to insert good/bad economic news here (especially the Intel & WaMu earnings).

In the past I'd either try and fight the trend or sit on the sidelines and disbelieve the news (negative thoughts on the economy).

Thank you :)

Mike said...

If I were this young trader I would be scared because...

(a picture is worth a thousand words)

1. Dow
2. S&P 500
3. Nasdaq

Toon said...

Hi Brett:
Sorry I have an off topic question.
I know you use Excel to create the charts. How do you export these charts from Excel to images so that you can include them in your pages?

West Coast Trader said...

The BIGGEST, most costly mistake I used to make in the market was to presume to know what the market will do next instead of letting the indicators and/or setups tell me. For some reason, I needed to be smarter than the market (based on my read of fundamentals and what was going on in the world at that time). Once I "dumbed it down" and let the indicators and/or setups guide me - I became a consistent trader. That simple. Why? Well, one of the reasons is that it will keep you on the right side of the trend and will prevent you from being a counter trend trader. Hell, I am now taking trades when stocks are breaking out to new highs. This used to be unheard of for me. I wanted to be the one that jumped on a counter trend move because I was smarter than everyone else that was setting the current trend. No more. The vast majority of traders, esp day traders, would do themselves well to develop a trend following system that captures the 2nd or third leg of moves. Hey Doc, maybe that is the reason that a lot of people want to counter trend trade - so that they can be the first to the party. It is in my system to now let the move/trend develop and then make it confirm itself with a second and/or third leg. It is ok for me not be the first to the party. I am sure there will be plenty of drinks and good conversation left for me to enjoy when I finally do arrive.

LiggerPig said...

That young trader is a great example of how to trade. Personally, I find it very difficult to reverse losing trades, and I'm sure I'm not alone.
I had the chance little over a week ago to do the same as your young trader, I read the market in time to see the setup, but failed to execute. Instead, I was content just to get out.
I can find only one recent example of a reverse trade I've made and that was a rare occasion I stayed in position until my target was met.
It seems not to matter how easy the online brokers make it for us to reverse, it's not something that we find easy to plan for.

Brett Steenbarger, Ph.D. said...

Hi Toon,

I use Snagit to take pictures of the screen, save them to a proper file format, and then upload them to Blogger.