Wednesday, January 13, 2010

Ever got into a trade and wondered why you did it? - Learn from my mistakes - Part 1

Ever entered into a trade and wondered why you did it? I don't mean regret after you see the trade going against you. No. I mean regret it as soon as you click on that place order button.

Take my FAZ trade today for example. As soon as I placed the trade, I asked myself - Now, why the hell did I do that? Well, I didnt know then and I dont know even now. I cant show you any charts to back my entry. Cant say that it was through any news. Cant defend myself by saying that I was reading the tape. But the bottom line is I still entered the trade. All I can say is I thought the market was going down and I did it. Then, one might ask why FAZ? Why not an inverse S&P ETF? After all, my feeling was about the markets in general and not financials in particular. Why not go with my chart of the day from yesterday - CAGC - which actually went as low as down 7% today? Like I said before, I have nothing to say that could back my actions.

I will share with you why I do it though - Its the feeling of being in the game!! Its the thrill of it. Its the feeling of participating in the market. Are any of these the right reasons for entering a trade? Absolutely no! Added to the fact that I showed fair bit of patience yesterday made me feel impatient today.

What's the solution? Simple! Dont do it!! Haha!! If only it were that easy. But there is light at the end of the tunnel. Take my example. I know myself and I know I make such stupid moves. So, when I know that I am about to enter a trade that I cant really justify, I risk a very small position and keep a tight stop loss.

I will probably get stopped out of my FAZ position anytime now. But its not about making or losing money. Its about doing the right thing. I would be writing this post even if I made a profit on the trade.

I will be writing such posts about my mistakes and labeling them "mistake", so I can get back to them easily and hopefully learn from my mistakes. That's the whole point of keeping this trading journal. Hopefully, some of you readers too will benefit from my experiences. There are a lot of sites out there that give you stock picks and market advice but along with all that, I also plan to make this site about the dark side of trading- the mental side. Hopefully, we will all be able to grow as traders together.

Share your own similar experiences in the comments section if you feel like.

Good Luck trading!

P.S.: I just checked before posting this and I got stepped out of my FAZ position. Hopefully, a big lesson for a small price.


Keith said...

I know the exact feeling you are writing about in this post. Especially when I first started trading, it was out of control. I wish I had someone here to smack my hand every time I tried to click the buy/sell button. I joined a chat-room thinking I could take all the alerts and make money ... big mistake. I was taking plays left and right and had no idea why I was in the stock or more importantly when to get out!

Now that I have more experience it happens less often. I still get that urge though when I see something or I hadn't taken any trades that day and jump in ... immediate regret.

I agree it's the whole thrill of participating, taking a position, making money, greed, gamble, etc.

positiontrader said...

Aha! Chat rooms...That could be the subject of a whole new post :). Its pretty amazing how everyone makes the same mistakes starting out yet each new generation of traders makes the same mistakes.

If you dont mind telling Keith, when did you start trading?

Keith said...

I'd definitely like to read a post on chat-rooms and how you and other traders have progressed. How long have you been at it?

I've only been doing this about a year and a half, including paper trading for a few months to start off, but it seems like forever.

I took a lot of heavy losses probably the first 6-8 months or so to be totally honest. I took a couple months break after that to refresh and read a few more books. Since then things have been good. I still make mistakes, but like you said in the post, now I know enough to keep the mistakes/losses small.

positiontrader said...

Thanks for the response Keith. I have been trading based on technicals for little more than you. I describe my background a little in the post labeled introduction. I admire your patience to paper trade, I could never do it. I actually didnt find it very helpful as the emotions involved when your actual hard-earned money is involved are of a whole new level.

Glad you are doing better now! About the last line of your comment.... I hope you dont equate mistakes with losses!

Keith said...

I agree with you on paper trading. I did it originally because I was completely clueless and wanted to get a feel of how things work and how things move. I did it the second time because I had lost so much I was almost scared to trade. It's definitely different when you put real money on the line. When I started I made money paper trading...and made big losses as soon as it was real money.

Nope! Losses are a part of the game. I'm just saying that when I make a mistake, I keep the loss small. I used to try and tell the market it was wrong and that any second now it'd turn and do what I thought it'd do originally. lol.

positiontrader said...

On the last sentence....Been there, done that!! I had given some thought to this point earlier and its not totally our fault. This is something that society ingrains in us from a very young age...not to give up! keep trying! Have confidence! Sadly, this is totally the wrong mindset for trading. Maybe a blog post on this one day! lol