The study of how your thoughts and feelings effect your trading decisions.
The mistakes in perception about how the markets work is often the key that fosters negative distortions in perception and thinking. Understanding classic erroneous patterns in trading psychology is a fundamental requirement for anyone seeking success in trading.
The Anatomy Of A Losing Trade
Taken from my personal trading journal, the following story may help inoculate you against committing a similar mistake in your trading. This was not the last time I made this exact mistake – and I always benefit from reminding myself of this trap:
“Today I’m holding the largest draw-down I have ever permitted to this point. Percentage wise and dollar wise… this is the most I have let a trade go against me and not taken my losses at a break of key technical levels.
Ok – it’s only the cost of a good dinner out for one. Not big bucks and that is good.
Great to be learning and experiencing this with a few bucks so that when I’m swinging a bigger line, I’ be more ready for anticipating this.
I’m certainly getting to know the category of mistakes I’m making repeatedly: my biggest killer is not taking profits at the right time.
So – each market and time is unique.
For example I am trading a coin that is counting down to the release of their ground breaking system. This has a time deadline and we are in between the start of that 30 day countdown and the finish. The first week saw a steady climb, now we are in a profit-taking price drop… and, the thinking is, that since the price rise before the release is likely – that I can hold this position and not take a loss now because of the ‘certainty’ of the news and situation.
And so as the prices are moving against me, minute by minute, I review the chart in all time frames and look to see technical levels in the past that may give me HOPE that this price level is the lowest it will go… and every up tick is a relief-generating validation.
Down-ticks seem like the last bit before it will turn around and I doubt how long they will last, and upticks seem like sure and certain evidence in my favor and the unrealized loss grows.
The margin is well above my maintenance margin and yet, get this symptom, I’ve stopped renewing my regular loans of btc and bts – so I can transfer them to my margin wallet to support the trade if I need to.
I shake my head, because holding a trade that
has not proven me correct is potentially catastrophic.
No one knows the real news that is causing this particular drop… what if something catastrophic were to happen to the development team? Prices would plummet hard, hard, hard and I would be most unhappy.
Thankfully, I really am only trading with risk money that I can afford to lose. I consider this money as my tuition fee for being a student in the ‘University of Trading’, I consider it the ‘research budget’ and I consider it the University course material that is published in my journals for other students to review.
I hope you add my experience to your own knowledge, and contribute to our community by sharing your stories and experiences too.
Today, however, I’m feeling the pressure of holding a trade in a draw-down position, instead of the delight of acting correctly out of the technical pattern as it developed.
You see, I was watching this triangle formation right at the point, as it created and confirmed the top formation – I was acknowledging that the price movement and sales looked too weak to push prices higher…
I was feeling doubt and seeing a potential top formation…
But I did not close my profitable long position and take profits because I did not want to miss out on the big win if we were just going to see a little pull back…
I held.
And the fall happened over a period of many hours… so it almost feels like slow motion all the way along as my profits slid away and soon I was holding a small loss. There was lots of time to rationalize each technical support and resistance area – this is where prices will find support and stop… ok, no? Well the next level is a stronger historical level… it will hold… hmm, no…
And slowly I watched the drawdown grow.
In hindsight, charts were really easy to read.
And I like to return and review both my thinking and what the chart actually did… so that I can learn whatever lessons are needed in order to become a more successful trader.
By studying this losing trade, and a few others like it,
I have adapted my trading plan with a protective stop just above my entry point – on all trades that have proven me correct.
After adding this filter to my trading rules, I have successfully entered a fakeout-breakout market a number of times, and exited with a very small profit or tiny loss – ready to trade again!
This filter does increase the number of times I need to enter and re-enter a market before the timing is perfect – but the increased maintenance of the early stages of a trade has saved me from much greater potential losses!