Last Friday, I presented my monthly trading results and said it was a good time to take a break from trading. Despite turning a small profit in January I had broken too many rules. Here is my my dirty little secret: through Friday, I made a series of trades that added up to my worst trading day in years. It was truly horrid. Thankfully, the trades are now closed. Here are my thoughts from the day:
Regardless of the outcome, I know this is the worst trade I have made in years. The relationship between the size of the trade and one’s rationality is only linear to a point. I passed that point a long time ago. I have taken on too much and it is has become impossible for me to step back and think with a clear head. I’m spending the day in a kind of hypnosis, just watching the price action (the ticker and the charts on different timeframes) without purpose. I have too much on the line. I keep on asking myself, ‘What am doing?’, ‘What have I done?’, but I have no answers…what is, is…I can’t leave the charts…why? Something might happen. Anything. I must be here. The trade is a simple one. Todays non-farm payroll data is terrible and yet, after an initial spike in GBP/USD, the dollar has rallied in a big way. I figure this move will be short-lived. It doesn’t add up. Yes, the dollar must sell-off. Prices do not move in straight lines. I have faith. I have bought the pound in size against the usd. I have done this repeatedly but I have been punished every time. Why hasn’t cable followed EUR/USD higher like it normally does?…I would have made a large profit. But no, today, when I need the correlation to stand strong, it has changed. EUR/USD stages a bit of a recovery but cable is not following. The pound is suffering of its own, and I am suffering dearly with it. This is not good. I know prices do not always follow the news in a logical way, but I need to understand what is happening. Are the days of interest rate differential driven exchange rates over? Afterall, themes change in the fx market every few years. But why is the market buying the usd now? What is the bullish theme? Is too much bad news already in the price? Perhaps expectations of higher inflation pulled the usd bulls in to the market. This doesn’t add up. Weak payrolls after a weak GDP print, and stronger inflation expectations supports the stagflation hypothesis, and that can’t be good for the dollar….can it? I realise I only have questions. There are forces beyond my comprehension at play. Fixed exchange rates and the large accumulation of currency reserves in the East and Middle East mean the market is rigged. I cannot expect to understand the flows. I have stops but I move them. The stops get hit. I add more funds to my account and buy more GBP/USD. This time the stops are much wider. The battle lines have been drawn. Market, I know what you are capable of and I have lined myself up accordingly. I soon am in profit, but it is not enough to cover the losses. I look for more, to ‘let it run’, as they say, but it is all hope. My trades turn back to a loss. From here I only ask for break-even. When break-even arrives I ask for a profit, and then to ‘let it run’ again. I have no plan…not here, not now. My plan is the law of chance. With the GBP/USD price closer to my break-even level than closer to my stops, the random walk says the odds are that I will reach break-even, even though the expected return on the trade is negative. When the price moves mid-way between my break-even and stops I realise that the random walk is not something to be relied upon. The odds are now fifty-fifty. But what about mean reversion after a big move? Yes, some snap back is in order. But I only have anecdotal evidence to support this. And then there is the powerful trend, the trend that has been against me all day. I am hopelessly pinned. I fall back on reasons why I shouldn’t be trading, the same reasons that plagued me soon after I started trading. My capital is inadequate. Part of me wants to die the death here and now. To end it all so I can get on with my life. But another part of me wants the trade to come good. That part ask of me ‘what the hell have I done?’. But my mind is numb to the most basic of thoughts. No, the simple fact is that my position is so big that I have become hostage to the price action…emotions fluctuates between positive and negative on every single tick move. Night has fallen. I have been sitting here since I woke up and now it is dark outside. A strong wind is whipping up outside, and I hear of severe storms on the radio. A large ship has been grounded on our shores and the weather is preventing recovery operations. I too, feel helpless. My throat is sore, I need food, I need the toilet, my body hasn’t moved all day and my mind is exhausted, it is not natural … but I must watch, because when I leave something bad will happen … I just know it. And so I sit. But for how long? In a few hours the mkts close. I never hold currency positions overnight, let alone over a weekend. I have read the accounts of HPT (a trading blogger who recently blew-up) and Jerome Kerviel. These are fresh in my memory. I make promises to myself. If I get out of this alive, I will stop trading currencies for a while, for a few months perhaps. There is an emptiness about me. I feel a part of me has died today. I close down my trading platform, leaving only a chart of cable open on my monitor. My positions are left open. I think I know how this will end. It is up to the Gods.
By the time the markets closed at 9pm on Friday, the few trades that hadn’t been closed out were trading a mere fifteen to twenty pips away from being stopped out. If a freak event happened over the weekend and the market gapped lower when it opened, I would be in big trouble. I tallied up the results. Assuming my trades got stopped out, I would be beyond my point of ruin and my trading activities would be shutdown. I came to terms with this loss over the weekend. Going to the gym helped enormously. I still had my physical health (not too sure about my mental health at this point) and I was thankful for life. Time to move on.
When the weekend came to a close, I returned to the monitor. It was just past midnight and the traders in Tokyo were at their desks. The Tokyo session is usually very quiet and this night was no different. I couldn’t sleep and I watched the screen until around 4am. GBP/USD had barely budged, but at least it had budged a bit higher. I slept for a few hours and awoke to see GBP/USD returning to higher ground. I started off-loading my position as the price edged higher. Using trailing stops in my last few trades, the market allowed me to close the whole episode with a gain of around 5%.
It is the worst winning trade ever, perhaps my worst trade of my life.
This trade reminds me of how I felt after I narrowly escaped a car crash. I was on the motorway, on the way to the airport, and looked up at the signs to see which lane I should be in. By the time I looked down, the cars ahead of me had come to a near stand-still and I was still going at full speed. I slammed on my breaks, locked my tires, and skidded forward, heading for a direct crash with the car ahead of me. I managed to swerve out into the left lane and escape the head on collision, but it was an instinct reaction and I hadn’t had the time to look to the left lane to check for traffic. That instant, I heard a loud horn from a truck that had been coming up on the left. I had missed both the car in the middle lane and the truck on the left lane by fractions of a second. At the next junction, I pulled up and got out of my car. I looked around, totally bewildered. I had narrowly missed a major accident.
I am a forgetful chap but this vivid memory of several years ago stays with me and I try much harder to drive defensively. In trading terms, this episode is a similar ‘near-miss’. May it live in my memory forever.