Eckhartd on losses

“The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. They are also able to feel the pain of losing. If you don’t feel the pain of a loss, then you’re in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will burn off. There is no way to survive in the world without pain. Similarly, in the markets, if the losses don’t hurt, your financial survival is tenuous.”

Losses happen and they are part of our trading education. If you don’t learn anything out of them, it is money wasted. Always ask yourself: what did I learn form that loss? What could I do, not to repeat it again.

Learning from your own trades

“The only real mistake is the one from which we learn nothing.” – John Powell

“Learning is not a spectator sport” – D. Blocher

Having a daily routine

Dr. Brett Steenbarger has an outstanding article on the importance of keeping a trading journal and how it should be used as a tool to improve your performance. I have been writing a trading journal for two months now and I find it exceptionally useful. I thought that I might share the basic structure of my journal. It might be helpful to someone or I might receive a constructive feedback on it.

My trading e-journal consists of 4 columns.

In the first one I describe the trade I took. For example I just write: “long 400 AMZN @70.23” or “short 200 AAPL @115”. I also put the approximate time I initiated the trade.

In the second column I answer myself: why did I take that trade. What made me do it. Did I follow my trading strategy for the day/week or I just got excited and emotionally initiated a position. For example, your entry might consist of the following: entered on a pullback, stock was within 15% of all time high, market was picking up; or whatever entry criteria you have; I mention what was my exit strategy, when I initiated the trade. It is essential to know what triggered a trade and where would exit if wrong. If done often and long enough, it will become a habit.

In the third column I deal with the problem: what happened with the trade. Did I close it the same day and why? Did I kept it overnight and why? Did I make a profit or I lost?

In the 4th column I ask myself what did I learn today/this week? What did I learn from my profitable trades? How could I repeat them or make them even more profitable? What did I learn from my losing trades? How to prevent them from happening again? I am very specific in my thoughts.

Have an open mind and be ready to react to any situation. Keep in mind that in trading the inevitable never happens and the unexpected constantly occurs.

Don't trust V-bottoms

 

We finally managed to have two positive back-to-back days for the benchmarks. There are many stocks that bounced from oversold levels, undeservingly so. They climbed to their 50-day MA, where they will find major resistance. Why? Because most of the investors in these stocks are under water and they will sell as the stock climbs, effectively killing its upside potential. Look for V-shaped bottoms. They are destined to fail. They represent an important occurrence in trading: there is often a significant short squeeze before next major leg down. A real, healthy bottom takes time to form. It takes months of sideways action in a relatively tight range. This is an indication of accumulation. Take a look at the fertilizer producer MOS. Between October and February it mostly moved in the 30-40 range. Since January, it gradually started to build higher lows until it decisively broke  above the $40 level. Every retracement was met with support at the 50-day MA. This is a healthy formation. I do not imply that this was the ultimate bottom for MOS. In this market, anything is possible. Just pointing out, how a sound bottom is usually formed.
 

 

 

Don’t rush all in after two positive days. We are still in a bear market and most likely things are going to get worse, before they get any better. How long is this rally going to continue is anyone’s guess. I’d say it has the potential to go until the beginning of next earnings’ season, when we’ll hit the hard, cold reality again. In the meantime, you could grow your portfolio by being extremely selective and patiently wait for the right set ups to form. You don’t have to trade every day to be profitable.