One Bad Trade

A trade that violates the trading plan can make money, but it can never be classified as successful.

I find the first hour of the open a grind. I have little problem staying up until 5 AM and functioning well enough, but awaking at 5 AM after 7 hours of sleep feels like walking through a George Romero flick. Try as I might, I've yet to create a recipe for alertness during that first hour and in order to mitigate mistakes I am prone to do during those foggy moments I attempt to keep disciplined and avoid trading. Sometimes I do and sometimes I don't.

Yesterday (09/07 in this context) was one of those moments I didn't and it's a shame because yesterday was one of my better thought out trade ideas and one I was fully prepared to take with the belief that I had a high probability, low risk trade. It was a trade I had spent an entire weekend dreaming about after having a crystallizing experience a few days earlier after a member of Stock Bee shared his methodology. Something about it resonated and I couldn't quite put my finger on it. Turns out, I didn't have to as a glance at my book shelf began to kick in a series of until then random incidents that suddenly joined together with the power of Voltron.

One look at my book shelf and Trade Like an O'Neil Disciple all but called out to me. Picking it up and leafing through the pages and index card was tucked away in Chapter 7. The note was simple: “Look to add a short idea of the Qs when MM turns bearish.” A clue in a book I hadn't picked up in 6 months led me down a train of thought where a few sentences from a video I watched months back echoed across my cranium and a tweet from Stock Twits flashed in front of my eyes as I recalled what I thought at that moment and how suddenly the trade referenced in this context began to make perfect sense. I couldn't sleep and continued to read this chapter 4 times and jot down some ideas to begin to work on over the weekend in preparation.

Going into the week I began to plan out this trade and how it would be executed and managed. I wrote down my notes in preparation:

 Looking to take a position in the QID permitting- looking for a day of increased selling. Not looking to trade an opening gap to the downside as that is the intended direction of this trade- an opening gap to the upside and fade on volume would be the ideal situation as it would offer a better price entry and risk reward situation- looking to trade on the path of least resistance and finding a solid entry is advisable.

Having what I thought was clear cut instructions for an entry signal it simply became a matter of stalking and it was during this stage that things began to unravel. The market did gap up on the morning which was the preferred direction for the trade. I watched the action during the first half hour and was anticipating a fade and simple watched how the action would unfold. Two events would have been a trigger for entry, the QID breaking the opening high, or the Nasdaq fading and breaking its opening low, but neither happened and yet I entered the trade anyways.

QID Order Flow

COMP with journal notes

This is where everything goes south. A successful trade begins first with following the plan devised during the off hours, taking the signal, determining if I am on the correct side of the order flow for my intended time frame and managing the trade accordingly. The main problem is that if the plan is not adhered to from the beginning then nothing else matters. If the entry signal is not taken correctly nothing else matters because it should have never gotten to the point where decisions are made on the fly. I should be fully prepared for the outcome and the follow up is simply the execution of this step. Once I entered this trade, what does having a stop matter anymore because I'm now in the land of improv and this is not a situation I am comfortable with and will likely listen to the cacophony inside my head telling me anything- “get out now and save your risk” or “ahh stay in, you have a stop loss in place as risk management.” While these are true in the context of the plan, they are no longer true once I break the second rule of immediately getting out if I have taken a wrong signal. So not only did I not take the signal, I compounded the error by not rectifying it immediately.

The following day I stopped myself out of the position as I no longer held conviction in the trade and decided it was in my best interest to simply cut out the cancer. I could let the market action after my exiting near the low of the day only to watch price rebound effect me and I could make excuses like, “I knew all along.” However, none of that matters when the trade starts off incorrectly, nothing can go well and nearly everything can be manipulated. Adding salt to the wound, not breaking down the position that night and making key decisions in the off hours about how to handle it and instead waiting until I'm involved during market hours before deciding is unconscionable.

Although the trade was was less than stellar, it s completely up to me to learn from this experience and avoid the repetition. A few keys I've taken from this:

• Trade execution that is flawed from the get go is flawed through and through-
• Learn to accept responsibility much quicker for a inadvertent trade-
• Defined risk does not justify keeping a trade that never triggered the signal.
• Once a trade is entered mistakenly, protecting risk is no longer about capital, but emotions
• The plan is to protect myself of the preparation phase from myself during market hours
• I am capable of convincing myself of anything at any given time in a trade
• The earlier a mistake is admitted, the easier it is to rectify and diffuse the negative charge building with each moment. 

One aspect of my character is internalization of dialogs.  Keeping my mind quiet is difficult.  This is somewhat detrimental when it comes to my trading, for as an internal discipline my mind makes little distinction between a trade being an occurring event and the numerous fantasy dialogs that bandy about my inner eardrums.  This post therefor is cathartic in that it is concrete and outside of myself and being read by others.  In this context it is easier for me to understand the reality and significance of this event and make improvements in my trading.  Now if I can just quiet down Heckle and Jeckle for a few moments.