Review time. Took three invalid setups this week. Why did I do that?
A couple of weeks ago trading coach and psychologist Brett Steenbarger wrote a brief article on five questions that traders should be asking themselves on a regular basis. (Incidentally, some time ago I studied one of Steenbarger’s books and shared a lot of my resulting findings here on the blog). In the end he concluded by saying:
“Perhaps the best question of all: How much time do you spend studying your trading vs. studying the markets you trade?”
This is something I have been doing more and more recently. Hence, in this post I work through two of the trades that I completed this week. Both of them I judged to be invalid setups – in hindsight. I wanted to understand why I chose to enter these trades in real time. Not just what and how did it but also try to understand why I behaved and analysed in the manner that I did.
First Case: #479 Short DAX
Read head & shoulders reversal pattern, and anything else arguing for a short-trade into the chart and ignored my earlier comments and analysis arguing for long rather than short setups. I guess my eyes were zooming in on any bit of information supporting a short trade, such as lower highs on 5M (XTF), and the red (bearish) 5M candles. A classic case of confirmation bias.
My theory is that I chose (consciously or subconsciously) to do this because I was scared of potentially missing out on a big move to the downside (FOMO). I need to remember that the objective is to trade my strategy. It’s possible that the market will move to the downside WITHOUT my strategy giving me a short setup – should that happen on a regular basis, then I would need to revisit my strategy. However, otherwise, I need to be happy to accept that I will not catch every big move that the market makes – shit happens, or in this case, doesn’t happen.
- Why did I do it? Fear of Missing Out (FOMO) on downward move in DAX
- How did I do it? Looking for information support short trade & ignoring conflicting/non-supporting information. Not reading price action correctly.
Here’s what #479 looked like:
Further Discussion: FOMO (Fear of Missing Out)
This is a concept in psychology generally, but also has specific applications in trading.
Assuming that FOMO was the reason for my inaccurate interpretation of the price action and the chart, then I need to ask “what triggered the FOMO?”. I am not sure of the answer – I have not thought about FOMO a lot to this point. My best guess is that FOMO is more likely to occur if I have not been experiencing profitable trading results (e.g. I am down for the session, I am down for the week, for the month etc). My chimp wants to have some wins, and I can’t get wins unless I actually open a trade to begin with. Reading and thinking about this a bit made me realize that FOMO can apply to choosing setups as well as to trade management. [Thanks to fellow trader M at the fund for pointing out a helpful article by Rande Howell on traderkingdom on FOMO and to fxsnowball on Twitter for a whole lot of suggestions on the same topic]
Second Case: Trade 484 – short Cable
Fear-induced early close on Trade #483 (on EURUSD) gave me a belief that “dollar will strengthen now” and I was keen to get short on GBPUSD, as I had been eyeing this trade up for 30-60 minutes already. Was it also a case that I need to make the profit that I missed out on the EURUSD trade, because price did not hit target? When evaluating the GBPUSD trade, I did not read the XTF price action correctly (higher lows and dynamic support from EMAs). Also FOMO? Also confirmation bias? Note that the specific circumstances prior to #479 and #484 were not the same.
- Why did I do it? Developed my own belief as to what will happen.
- How did I do it? Not reading XTF price action correctly.
Did I enter the trades at good levels? Did I manage the trades well?
Who cares! On the above two trades, it is more or less futile to consider whether the trade was entered at a good level and/or whether the trade was managed well. The answers to these questions don’t matter because the setups were invalid to begin with. The sole appropriate cause of action is to close the trade immediately if coming to the realization that the setup is not valid.
The above review & analysis took a lot longer than I had expected – I only got as far as evaluating the trades that I should not have entered this week.
The questions of whether I entered valid setups at good price levels, and whether I then managed the trades well, are questions I also want to, and need to, explore. That said, for now, I am fairly sure I have at least two pressing issues as far as trade management is concerned:
- Tend to withdraw target orders if price moves rapidly towards my target area = greed? Incidentally this also seems to be FOMO issue – and is actually somewhat identical to the example of the trader Mitchell in the traderkingdom article
- Am not setting targets prior to entering into a trade – what are the disadvantages associated with that?
- It stops me from assessing whether the setup offers a good reward-risk ratio prior to price encountering support/resistance areas – this may help me to decide to pass on some trades
Well, that’s all for now. Hope that you found the material interesting, and please feel free to share the blog post on Twitter, Facebook or LinkedIn!