My worst winning trade, ever

 

monkey-at-desk-rounded.jpg

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.

cable-roller-coaster.jpg

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.

Advertisements

21 responses to “My worst winning trade, ever

  1. Amazing event, and very well written. Good to hear you weren’t killed, in either incident, but you were lucky mate.. and you should know better than to put yourself in this sort of situation again.

  2. Pingback: Surviving in this game : Trader Eyal

  3. Thanks Eyal ..and your reprimand is heeded. It can’t get closer than this. As you say it’s a shameful, 100% fluke, nothing else. I have no valid excuses and can only thank my lucky stars that I live to trade another day. In the boxing world, you sometimes see a boxer in the ring lowering their game to that of a street brawl. In the heat of the moment, they forget all their techniques and training, and what their corner is telling them, and they flail their arms about all over the place, looking for the knockout punch with every swing. Quite often, they end up on the floor.

  4. There’s a lot to be learned from just reading your own words again perhaps, a lot of answers are there. I note that I can understand something on an intellectual level, even write something on my blog and only some time later do I understand it an emotional level (able to implement or trade it). Just this week I was googling for a trading answer I needed and was amazed to see what I needed as a ‘cut n paste’ piece of wisdom I had put on my own blog some time ago!

    I’m thinking of Seykota’s ‘We all get what we want’ line at the moment, perhaps you need to think about that as well.

    Good luck with it all and thanks for posting such a personal story.

    Andrew.

  5. Pingback: Humble Money » Blog Archive » links for 2008-02-05

  6. Waiting until it ends all is the hardest. You are just frozen, can’t do a thing and just want it to end finally.

  7. Pingback: Good to Go Pile . . . « Trading for the Masses

  8. masteroftheuniverse

    Andrew,

    Great post….we’ve all been there and can relate. I’m a rather rational guy, and use great discipline when I trade. That being said, I am totally irrational when it comes to copper. Copper owns me(and has owned me since 1986), and the universe would find a way to make me lose money on copper even if I was long 100 contracts at the bottom on a limit up day. I finally had to take copper off my metals screen….however, I sneak a peek every once in awhile.

    Great post as usual.

    Jeff

  9. have u ever thought about writing a book? i’m not saying to do that instead of trading…one momentary lapse in judgement doesn’t define us – although it can change our lives depending on the circumstance…you’ve done an excellent job of building your account while controlling risk…so you obviously know what to do

    your posts and insights are always entertaining…there aren’t many fictional books out there that appeal to traders…it might be something to think about while you’re on your break…who knows, it might even be therapeutic

  10. Pingback: Close Call :: Move the Markets :: Entries ::

  11. I’m glad that things turned out well for you.

    You story of the near car crash reminds me of the near-death experience that I had when I was 19. I was underneath my Dad’s truck trying to hook up a tow chain to the chassis since my car was half in the ditch. The truck began rolling forward while I was lying under it. I just waited, assuming that my Dad would stop the truck and was just moving a few inches closer. A moment later I realized that it wasn’t going to stop…saw my father alongside the truck trying to futility hold it back with his hands…and a Ford Bronco’s back tire rolled over my chest, crushing the air out of me. I blacked out for what felt like minutes. I opened my eyes seconds later and my father was beside himself…I just told him that I should see a Doctor to make sure I didn’t have broken bones.

    I’m sure you guys have seen stunt men have cars run over their chests using ramps. I did it without a ramp but the truck was moving at exactly the right speed, I guess. I didn’t break a bone…just knocked the wind out of me.

    I’ll never forget it, though. Never.

  12. As someone who has gone through the same thing, I understand your feelings completely, and it is the reason I have stopped trading. Your description was right on.

    This episode should be a warning to you (and everyone else) that even with a good trading plan and discipline, we are all human and can get sucked into a neurochemically-induced paralysis. Always have a healthy respect for the market, and always fear your own biology! The trader is the weakest link, sometimes, when it comes to trading.

    I wish I could tell you what to do now. After doing something like this, there’s a feeling that you have broken your personal trust forever. That no matter what you do from now on, your discipline is always tainted. As with lost virginity, your word to yourself is now gone forever. Maybe it’s just me. But if not, I hope you find an answer, and if you do, let me know what it is!

  13. Thanks to everyone for their comments.

    Andrew – Seykota’s ‘everyone gets what they want’ line always come back to haunt me on the downs. The blog is indeed a great learning tool, a way to talk to oneself and to others…its just a matter of listening (remembering or going back and re-reading).

    John – I have indeed thought about writing a book many a time (don’t we all!). Perhaps I need to suffer a massive wipe-out and enter the equivalent of a modern debtor’s prison, where I am given nothing but a pen, pad and a few weeks of isolation. On second thoughts, perhaps I should try and pursue this on the ‘outside’ before such drastic measures! And thank you for the kind words: ‘one momentary lapse in judgement doesn’t define us’..it is important to keep this in mind.

    Oh, one great fictional book is ‘Bombardiers’ by Po Bronson. Absolutely brilliant.

    Michael – Thanks for sharing an amazing story. I can’t believe you didn’t break any bones! We are lucky in two senses:
    * We both had lucky near misses and survived physically unscathed.
    * These lessons live on in our memories and so will affect our future decision making when it comes to risk.

    Prospectus – You have told me what to do. Its good to hear from someone who realises there limitations and stops trading before crashing and burning. Very rare. It is true that personal trust is broken but I kind of rationalise this by thinking that such breaks happen quite often (cheating on new year’s resolutions being one example). Trained in economics, I often assume we live in a logical, rational world, but trading teaches me that this is not the case, and that humans are full of weaknesses and foibles. I guess that’s the upside of trading…that we can take lessons from our experiences and apply them to life, just as lessons from life apply to trading. Myself, I have cut back on trading, but it is only the first step; I plan to put serious constraints on my trading activity as the year progresses.

  14. thanks for the book recommendation…it looks interesting for sure

    as far as all of wanting to write a book, that is probably true…however, u r talented enough to do it…i’ll take a signed copy, and even pay for it 🙂

  15. Thanks John. I might just take you up on that offer !

  16. The number of trading burn-outs in the blogs makes me believe that the stress of the markets these last months is taking its toll.

    I suggest you ‘unplug’ – plant some bulbs, turn off the computer, avoid newspapers for a while, play some music. build a fence, clean a shed. I did this with a good long trip to Africa and realized how ‘over-intellectualized’ my life/modern life was and it put things back into perspective. Aren’t there walks around the coast of England you might take, or crew on someone’s ship to the Caribbean, or an overland trip to India and SE Asia.

    While you are clearly a good writer, I would doubt that is the best use of your time just now.

    In some odd way the inexpensive lifestyle you have is likely helping you continue some not-so-smart habits but we all have confidence that you will sort things out.

    Happy New Year and Good Luck.

  17. Nonadamas, good to hear from you old friend.

    I will take your advice re newspapers and other such news, restricting myself to the entertainment pages and reviews only. I’ve actually been thinking about doing this for a while and have recently wished for a regular subscription to a newspaper/magazine from 50+ years ago, as I feel this would be more useful for insights into daily life and the bigger picture. I am going to the gym and listening to my ipod already, and this helps to no end. The weather seems to be turning away from winter so I’ll be reconnecting with nature more often, even if this involves small things like relaxing in the garden or going for short walks. I feel this is important in maintaining a healthy mindset.

    It’s very true that the inexpensive lifestyle enables me to coast along without feeling discontent. However, I will indeed be travelling to around IndoChina in March and despite the strong pound, this big expense item will blow my account through the point of ruin and I will stop trading. Because I have reduced my trading activities already, I know I cannot build a suitable buffer over the coming month, but I am ready to step back. Three years is a long time. In one sense, I view stepping back as a training period for an eventual return to trading, with activities in life acting as testing pads for discipline, risk management etc.

    Happy New Year to you as well buddy and thanks for dropping by.

  18. Pingback: Eight Diagram Pole Fighter « A Canadian on Wall Street

  19. Pingback: The final blog post - concerning Ivan Drago, and an accounting of the similarities between myself and the real Caravaggio « the 3500

  20. it feel good to see that we are not alone I have been there too. But one thing that bring me back on track for good is the Hector trading seminar.
    realy cheap to buy and you can sign up and get the first chapter of the course for free, that free portion was just enough to get me back on track. I did pay thousand dollard for seminar but I’m telling you if I share this it is not to make money because I’m not affiliate to this product, but because I understand how trading can get very hard and if you dont get the rigth mind and the right knowledge to apply you will go to a disaster. loosing money is not the worst thing that can happpen it is how badly it can affect us . And this one is just by far the best best strategy to use and just so simple.
    So do yourself good and at lease get the free chapter, you will be amaze you will improve your trading like you couldn’t think of.

  21. Do you mind if I quote a few of your articles as long as
    I provide credit and sources back to your site? My blog is in the very same niche as
    yours and my users would really benefit from a lot of the information you present here.

    Please let me know if this alright with you. Thanks!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s