Fire sale at last chance saloon

It was during the Asian crisis of 1997 that hedge fund poster-boy, Victor Niederhoffer, blew up in spectacular fashion. Niederhoffer’s losses were so large that he literally had to sell the family silver, staring ruin in the face. It must have been very disheartening. I never climbed the dizzy heights of a Niederhoffer. No, I started at the bottom (in terms of performance) and worked my way lower. A few months ago, after a series of considerable losses, I had my own fire-sale auction on E-bay, selling the following items: a wireless modem, a wireless mouse, my prized Rocky and Godfather box-sets, my vintage fountain pens, a new mobile phone, an alarm clock, a digital camera, my financial calculators, my sporting equipment, and a great many books.

I mention Niederhoffer’s experience because he learned from his mistakes. After falling from such great heights, Niederhoffer was humbled but he was not finished. The Matador fund, which he advises, has posted average gains of 50% a year since its inception in 2001 (according to Wikipedia). It is a great story. One of my favourite quotes from Niederhoffer is “I don’t know how to make money without taking the kind of risk that would be disastrous for many people to consider” because I share  same view and appreciate there is no escape from risk, especially from my current vantage point (near ruin).

I mustn’t be deluded with false hope, however. While I believe I have a profitable approach to trading, surely all traders think the very same thing. My past performance and behavioural deficiencies also suggest the odds of surviving the months ahead are low; I am already several thousand pounds below the level at which I had my auction (still, I don’t miss the items I sold and have come to view ‘ownership’ as highly over rated.) I know I cannot achieve the consistent performance of the Matador fund but it remains beacon of hope, a shining example of a humble come back in the face of adversity.

Niederhoffer and his collaborators post many useful insights at Daily Speculations.

Every man has his poison

… and mine is caffeine. I estimate I drink about 5 to 7 cups of coffee or tea (I am British) every day. Until now, I had never considered the potential impact of caffeine on my trading decisions.

The Wikipedia entry on caffeine shows how the toxicity of caffeine can affect a spider’s web-spinning abilities:

I know I am not a spider but this is not a good sign, especially considering that I tend to make my brews just before I get busy trading.

Temptation

Anatomy of my downfall

The run of trades that brought my account down to £3500 reveals my trading deficiencies:

My first trade involved a reasonable level of risk and made a reasonable gain. The second trade was a repeat of the first. By the third trade, the original opportunity I was trying to exploit was no longer evident in the price action and I reduced my trade size to a more modest level. I made a modest gain. I put the trade on again and made a modest loss. With hindsight, this is the point where I should have stopped. Maybe, I had already gone one trade too far.

But no, I felt compelled to make good on the loss. I traded in bigger size and lost some more of the profit. Then I thought to myself that everything was still okay, that I still had a cushion of profit as a buffer and that I must try and recoup the losses of the last two trades. I traded again, but in bigger size, so the trade needed less of a price move to make my profit. I lost. I traded again. I lost again. I was back to break-even for the day. I couldn’t bear this. I had just wiped out the entire profit for the day. No, I must have something to show for the day’s efforts, I said to myself. I traded again in even bigger size. I lost a large chunk of capital. I felt nauseous. I rubbed my eyes and called it a day. My capital had shrunk to £3500.  

This series of trades took place in a window of around an hour. This pattern has been repeating itself for about a year.

There are several identifiable problems with my trading. There is the feeling that I have to be in the market, tasting the action, at all times. There is the desire to exact revenge for my losing trades, where I am trying to get the market to pay up without foundation. Worst of all, there is the feeling of ‘possession’ when I start losing. At this moment I feel I have lost control and that am on a kind of auto-pilot; my mind starts going fuzzy and I lose all clarity. I am coming to realise this as a pure gambling addiction.

Over at the Traderfeed blog, Brett Steenbarger has a useful article discussing the topic of trading addiction. Brett’s comments are in italics:

The first step in dealing with any addictive pattern is identifying it–and identifying it as a problem. Here are a few questions that you might ask yourself:

* Have there been times when I told myself to stop trading, but still found myself placing trades any way? Me: Yes, just see the above example.

* Do I find myself overtrading by putting on positions with too large size or by trading during periods when nothing is happening? Me: Yes, after a period of success I keep on trading until I am down to a net loss. Only then do I stop.

* Have my trading losses created problems for me in my relationship(s), or have they caused financial problems for me? Me: Yes, definitely.

* Have people close to me told me that I need to stop trading? Me: Yes.

* Is the pain from losing more extreme than the satisfaction from winning? Me: Yes. I don’t feel any joy from winning, only shame when I lose.

* Do I find my moods fluctuating with my P/L? Me: Yes. My P/L affects my sleeping and waking life.

* Do I trade simply out of boredom sometimes? Me: Yes

* Do I find myself preoccupied with trading outside of market hours at the cost of other work and relationships? Me: Yes, its like a virus that has dulled the importance of other aspects of life. Trading is all there is.

If you answered yes to three or more of these questions, I would suggest that trading has become a problem for you. It seems I have a problem. The paradox of it all is that I don’t get any kind of rush or high from trading. It actually creates more anxiety than anything else. 

Telling yourself you can manage your own addiction is itself a form of denial. But I really think I can, with the help of this blog as a mirror. But maybe I am delusional.

Do the right things:

1) Close your account.

2) Get help.

I can’t bring myself to do this. Not now. I need closure. I must either go to zero and leave the trading life, or I must trade my way out of the darkness. The risk is that I am fooling myself – that I will go to zero, become a wage slave, and continue to feed the addiction with my salary. I must tread very carefully if I am to kill this demon. Brett points out that a ‘A family history of addictive problems is one of the best predictors of risk for addiction’ and I am fully aware that my father came within a whisker of losing the family house because of a gambling problem.

The downward spiral

I have allowed the weakness in my trading to permeate through to the rest of the life. Poor trading results ate away at my motivation and I stopped going to the gym, I lost my interest in literature, and I started heavily snacking on junk food. In turn, the deterioration in body and mind has fuelled my trading insecurities, trapping me in a reinforcing loop of negativity.

Everything has clearly been upside down. I need to do what I can to promote a healthier state of mind. Following Rocko’s advice to take a break, I went back to the gym, but I found that I could barely do 10 minutes on the exercise bike before I was out of breath. It is a great barometer of my pathetic slide; before I stopped going to the gym I could cycle for 45-60 minutes at the same pace. Still, I feel a lot better for the effort and the fog of inescapable loss seems to have lifted a little. I feel I have a little more self-control.

Week 1 FX trading results

Managed to eke out 14% in the currency markets this week. My trades involve an appalling level of risk, but I suppose I have no choice if I am to stand a chance of achieving an unreasonable target.

On one occasion, I avoided a massive drawdown by heeding Alan Collins‘ advice to ‘Take smaller positions with risk levels at levels where you would be clearly wrong’. On most occasions however, I have to ignore this advice if I am to get anywhere. It is not so much currency trading as it is a game of Russian Roulette.

Also, I have tried to follow some of Rocko’s wise words, and am spending a little less time in front of the trading screens.

Desperate measures and a sore thumb

Several months back, as part of an effort to raise capital by any means necessary, I sold my wireless mouse on E-bay. I gained £10 for my efforts. After using the touchpad on my laptop for around three months I have also gained a very sore thumb.

Trader’s prayer

Over at Forex Project, a trader by the name of Bill has posted a Trader’s Prayer. To summarise, the prayer asks the Lord to grant him (or her) WISDOM, SELF-DISCIPLINE, PATIENCE, COMMON SENSE, INITIATIVE, EMOTIONAL BALANCE, HUMILITY, DEDICATION, COMMITMENT, UNDERSTANDING, and GOOD SENSE.

My trader’s prayer will be known by many:

God, grant me the serenity to accept the things I cannot change;

courage to change the things I can; and

the wisdom to know the difference.

Living one day at a time;

enjoying one moment at a time;

accepting hardship as the pathway to peace.

According to Wikipedia, the prayer is used widely in Alcoholics Anonymous groups, and in other 12-step programmes. It hits home as I attribute a large portion of my losses to a possible gambling addiction. Also, the first portion of the prayer can also be directly related to the probabilistic nature of the markets, to the notion that even after you have researched a trade and are as sure as you possibly can be that the price should follow a particular path, very little in the markets can be predetermined with certainty.

Sage advice

Thank you to Trader Rich, over at Forex Project, for discussing one of my comments. He, along with a chap called Rocko, have commented that it may be appropriate to take a temporary break from trading. My response to Trader Rich:

Trader Rich, thank you for your comments. Your advice to ‘stop now’ is wise, and it was a part of my trading plan – to take a break when things got bad. The plan was sensible and logical, but I have ignored it. Now, I can’t bring myself to stop trading.I am at the stage where I need work through this ‘darkness’, one way or another. Family members have offered to lend me money so I can continue, but that would be even more foolish (if that is possible). No, I must either run down the remains of the capital or ‘make good’ and find some kind of redemption.

Rocko also comments that it may pay to ‘do some more research, learning, self hypnosis, and develop a strategy that would allow you to trade confidently’. My response, which also discusses how I got to where I am: The idea of self-hypnosis is relevant because I created a profitable system but I lacked the ‘will’. Actually, I suppose it is less of a system and more a of ‘trading approach’. I will write more on this as the days go by, but the rub of it is that the approach produced nice profits. Then why the demise? I used the profits to throw money at new trading experiments knowing that I always had something to fall back on (my core strategy). My thinking was that it wasn’t prudent to rely on one approach. I was wrong. I should have allocated all my capital to this approach. When things started to turn sour I returned to my original trading strategy but allocated so much capital to a handful of trades whose outcomes, how should I say, fell on the wrong side of the ledger. Things quickly spiralled out of control and I find myself here. Now my core strategy may be wobbling over…if it is, I am done for.

Allan Collins, a trader with close to 30 years of trading experience, offers the following useful advice: ‘Take smaller positions with risk levels at levels where you would be clearly wrong.’  My response:

Allan, your sage advice, backed up by your many years of experience, is heeded and appreciated. Smaller positions and wider risk tolerance was the way to go. On balance, my account would have been much stronger if I had followed this simple advice. I will bear this in mind in the future, if I ever return to trading.

For now, however, this is not an option. Because my core strategy only involves a handful of trades every month, and because I am coming from a very low base (£3500), my hand is forced. I may be setting my self up for failure but I feel I have to take big risks because of where I am in the game.

It seems as if I am being ignorant of all the advice being offered. This is not the case. It is just that I am so deep in the hole that the desperate situation demands desperate measures. If I find a way out of this hole I will be sure to heed all these wise words of wisdom.

For sure, it is helpful to hear the supportive voices of other traders in this otherwise solitary activity. Thank you to all.

How it was meant to end

The following quotes from Lord Katsumoto, the warrior-poet in ‘The Last Samurai’, have a certain resonance with my trading life:

KATSUMOTO: A Samurai cannot stand the shame of defeat. I was honoured to cut off his head.

KATSUMOTO: It was a good death. Hirotaro died in battle. He tried to kill the American, and he was defeated. It was Karma.

There is death with honour and death without honour, and there is the shameful death. Like the death of Katsumoto in The Last Samurai, so my end was supposed to be an honourable one. This is not what is transpiring and only I am to blame; there is no one else, only me and my weaknesses. In my trading plan the point of ruin was at 50% of the original equity and if I had stuck to the plan I would have committed Seppuku (self-sacrifice) several months ago. At least then I could have proceeded to get on with my daily life. Instead, I have ignored my well thought-out plan and seem to have chosen the option of further squandering my capital. My grandiose ambitions were unrealistic, I lacked fortitude, and I have let greed blind me from the reality the unfolding reality of capital destruction. As my trading death nears, I am fully aware there is no honour in my actions. It is quite possible that I am beyond an honourable death. 

KATSUMOTO: Taking a man’s life is nothing. You cannot take away his honor. To know life in every breath. Every cup of tea. Every life we take. That is the way of the warrior. …that is Bushido.

It saddens me when I realise how the quest for perfection can extend from trading to all of a person’s actions, from the moment he wakes to the moment he sleeps. It saddens me because I have allowed the weaknesses in my trading to extend and infect other aspects of my life, eroding my motivation for good health, dulling my previous interests, and closing my mind’s eye of to beauty of life.

KATSUMOTO: …man can change his destiny? ALGREN: No. I think a man can only do what he can, until his destiny is revealed.

KATSUMOTO: This is not your battle. You do not have to die here.

If only.