|Ultimate Trade Analyzer Discussion for Ultimate Trade Analyzer owners to share results, questions and other feedback.|
|03-26-2011, 06:23 PM||#1|
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Point of View; A Critical Component to Success As a Trader
If the trade moves towards its target objective, and we bailed out of the trade due to some emotional human response, we would feel pretty bad about our decision. "Why couldn't I just stay with the trade? I'm sooo stupid!" In fact, it would be hard to not think of even harder phrases to berate oneself for making such an error. "Why couldn't I just 'lean' on the system?"
An even worse result would be if you made the 'right' decision on that trade by bailing out and avoiding a deeper loss. You would breathe a sigh of relief perhaps, and feel good in knowing you were able to make the 'right' decision and save some money. Unfortunately, while saving money on that one trade and feeling proud of yourself for being 'so smart,' you actually hurt yourself in a much more profound way than you probably realize. What are you going to do next time? How about the time after that? We're traders right? We have to take another trade. Bad habits are very hard to break, especially when you reinforce them with short term 'righteousness.' Before long, we're not even trading our proven trade method any more. We're trading something else and who knows what edge that gives you over time?
Making an emotional or human decision that proves to be 'right' on a particular trade will most likely prove to be very 'wrong' for your trading in general.
One of the things you'll hear me (and the rest of the NetPicks team) harp on all the time, is the importance of sticking to your tradeplan. If you are truly trading to make money, which in my opinion IS the only valid reason to trade in the first place, than you MUST practice your trade business in a manner that WILL make you money. The only way I know to achieve that objective, is to allow the edge that your trade 'method' or 'system' or 'tradeplan' (whatever you want to call it) gives you. It is NOT what happens on this particular trade or series of trades. Because guess what.. Now we have to take another trade. That's what we do. We trade.
So much can be written (and has been) about this very subject. Rather than rewrite another 'book' on this critical subject, I want to tell the story in another way. Below are two examples of our Russell eMini trades. The first, is an equity curve showing our system trades (most being called live in our traderoom) with the SST for 2011. It follows the very same tradeplan that I began using back on April 5th of 2010. In fact, the second example is the equity curve that includes all the trades from April 5 up to the end of yesterday's trading.
These two equity curves show you the same trades made this year, 2011, but from an entirely different point of view.
Equity Curve (see below); 2011 Trades: The Russell eMini is always a challenging market and like this same period of time last year and the year before, these first few months of 2011 have been a real challenge. You can see by this equity curve that there have been some tough sessions and tough losses. The curve peaked near the beginning of February, and then has been up and down and up and down ever since. There have been some downright difficult sessions, for sure. In fact, last week (the week prior to this one) was the worst performing week since going public with the SST and the TF. Wow! If you were a trader who just began trading the TF with the SST, you might have finished the week quite shell shocked. You can see the drawdown that happened, following the 3rd peak on the equity curve.
Anyone who did not follow our ongoing advice to create a strong foundation by digging your 'trader ditches,' that is, backtesting and practice trading prior to going live, would have been seriously damaged by the experience. Not because of a tough losing week, although that is the immediate, apparent damage. No! The real damage is the result of a very narrow point of view. Those that quit as a result of a tough week, without having the broader perspective and higher level 'vision' will throw a way an amazingly effective tradeplan, quit with their losses and will completely miss the next 'two steps forward' that lead us to all new record profit levels. This is the ongoing cycle for most traders. Always behind the curve, chasing the performance that already happened and reacting to the 'one step back' that again, already happened. What comes after one step back? Two steps forward!
This current week that just ended, turned around rather dramatically and we went on a 14 out of 16 trade winning streak, completely erasing the prior week's losses. You can see that on the equity curve too. Notice how we are just a few trades shy of making a new equity curve high. What a roller coaster! Especially if you did not already experience the 1000 or so trades that happened prior to these two weeks. Take a look at the next equity curve.
Equity Curve (see below); all trades since 4/5/10: Do you see the last part of the chart on the right? Notice the zig zagging up and down of the equity curve. It looks like a few bumps in the road when you put it in context to the overall curve that dates back to the beginning. In fact, it doesn't look like a roller coaster at all. You'll see other parts of the curve that also steps down. One step back leads to two steps forward. I don't care what market or timeframe or trade method you use, a healthy and profitable equity curve WILL contain tough sessions. There's no such thing as a straight line to ongoing profits. The road is always bumpy. If you keep chasing, you'll end up losing all your money even though you have a winning system. Yikes!
Sadly, those that quit will continue to experience this exact pattern. They'll see something they like and will begin trading at the end of the two steps forward. They'll catch the beginning of the one step backwards and their account will take what should be, a momentary drawdown in equity. But as the cycle continues to unfold, the same trader will quit, right at the moment they have experienced too much pain, and unfortunately for them, right at the END of the one step back. They'll quit with their losses and run for the exit, just when the two steps forward is about to get underway. They keep jumping on board the equity curve at the wrong places and continue damaging themselves by hopping off, also at the wrong place.
Is this YOU? Hopefully you can see and understand the theme of this article. Point of View is EVERYTHING! Are you the person lost in the forest, running around dodging a bunch of falling trees? Or are you the person taking the bigger birds eye view of your entire forest? The individual trades you take, the very trades that have you fretting at the right edge of the chart, making very human (and WRONG) decisions, are the trees in your forest. You are lost in the trees and can't comprehend your forest. Sure, you might successfully jump out of the way and avoid a falling tree, but you are lost in your forest. You can't find the edge. You can't benefit from the edge of your tradeplan, system, method.. whatever you call it.
Your equity curve IS your forest. If you can't be at peace with sacrificing 1/3 of the trees in your forest in order to grow your forest 2/3rds larger, than you will experience complete deforestation! It's all about point of view.
The longer term equity curve is sitting a mere 8 points below its all time profit levels, despite the last several weeks of difficult trading. At some point we will look back at this article and we'll be addressing these same issues again. Only next time we'll be on the verge to breaking our 800 point level, instead of skirting around our 500 point level. We will have grown our forest 2/3rds larger. Again. Where will you be?
Note: It doesn't matter if you are a forex trader, or a gold trader. It doesn't matter if you trade stocks or options. This is a universal theme. Do what is necessary to achieve the higher level point of view and you will have taken the first and most important step towards ongoing success as a trader.
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