Losing Days And The Ability To Remain Nimble And Flexible

I've had a few people ask me lately how I handle losing days/streaks in my trading and so I thought I'd write a post about how losing days affect me, and I'll also touch on some of my risk management techniques, and how they help me manage my emotions and draw downs.


Before I get into anything about how I myself handle losses etc. I do want to point out, EXPECT TO HAVE LOSING DAYS/STREAKS... it is a part of trading and so the best way in my opinion to handle your emotions is to just accept it. You will have bad days/weeks it's a part of trading. Think of it like a business, you have income and expenses... the losing trades are your expenses... all business have expenses!


Another important component to managing your emotions is to have complete confidence in your style of trading/system. If you truly believe in your strategy/system, losing days should not be a problem, as once again, they are to be expected.


Losing trades can also teach you a few things about current market condition and your strategy. For example, whenever I make a losing trade, I take it as a signal that my current bias/opinion may be incorrect...the market just told me that didn't it? In other words, a losing trade is when the market invalidates your thought process. Although I do have max loss amount for percentage wise factors, I typically do not put on a trade with a hard stop in place. I put on a trade because I have an opinion on where the market should be going, and I have reasons as to why it should. The only time I should be closing my position is when my reasons for getting into the trade have been proven incorrect, not because I'm down a certain amount (unless of course it is a safety max loss). These reasons could be, the market reaches a level I wasn't expecting it to, or an economic report comes out that goes against my opinion. All in all, you should have a position in the market, until mother market tells you your wrong.


I also believe the ability to remain nimble and flexible is a great attribute for a trader to have. A nimble trader can switch sides almost immediately when proven wrong. In other words, a flexible trader goes with the flow of the market. He may have an opinion on where the market should be, but if the market's is trending, he has to be riding that trend. In the end this business is about making money and the market doesn't care about your opinion. That is why although it is important to have an opinion, you have to be willing to accept that your wrong, almost immediately. 


Today was a great example of a day in which the market (let's use equity, the S&P 500 as an example) invalidated my trade ideas. Today was a losing day capital wise, but was a winning day for me trading wise. I went from slightly bullish yesterday, to more bullish on the opening of today, to completely bearishly positioned by lunch time. I am happy about how I was able to remain flexible and completely switch my trades around today. Let me go through my thought process as the day progressed with a chart of the S&P 500 futures market.

Notice how in about a 1 hour time frame, I have completely switched sides as the market proved me wrong. The best reward to risk trade appears to be on to the downside in the equity market and I have positioned accordingly.


Risk Management Techniques


My entire trading strategy is based upon reward to risk as it just makes sense to me. Although my rules are meant to be broken at appropriate times, I typically never have a reward to risk of worse than 2:1. Why? Well, if every trade has a reward to risk ratio of better than 2:1, I can be wrong more than 50% and still make money! I also assume that I have an educated ability to judge market momentum, and that just adds to the potential profits.


Diversification is also a huge component to my risk management techniques. I like to try and be in many different markets at once, as it allows me to have a pulse of every market, and hedge better. For example, if I believe we will see economic growth in the U.S., I will build a position in the S&P, oil and copper. Why? Simply put, one position may do better than the other. I am also hedging against component risk. For example, when you purchase the S&P 500, you are subject to earnings risk. So if you think the economy will grow in the next quarter, copper and oil should rise, but there is the risk that a few major stock components in the S&P may falter, bringing down profits in that position. Diversification allows me to spread my risks out evenly.


Hope this was an info rich post! Have a great weekend!