Derive pleasure from following your trading rules, not from profits

One of the most difficult things in trading is associating pain or pleasure with following (or not following) your trading rules, and not from your day-to-day trading results.

Trading results are random. That is a fact.

For example, let’s say you have an edge that results in you being profitable 60% of the time. This means that you will still lose money on 40% of your trades. Beating yourself up for these losses has zero benefit to you as a trader.

We are battling ourselves

The human psyche is fragile. We are battling our egos.

Sometimes in trading we get more concerned about being “right” than making money. This is why we sit on losing positions, hoping they come back in our favor. This is why we don’t take small losses, allowing them to turn into big ones.

I was stuck in a rut, which I’m working towards getting out of. Today has been a step in the right direction for me. Today my focus is on following my trading rules, not make a profit per se. This is really hard to do. Besides, isn’t the goal to make profits after all?

Associate positive feelings with following your trading rules, not the end results

Accepting that a trade is going against you and cutting it should be associated with positive feelings because you cut those losers early.

No one wants to lose money, and that’s why it’s so hard to associate a positive feeling with taking a loss. Taking losses sucks, and we all wish they were avoidable.

It’s difficult to do this. Losing money hurts. But, it’s important to reframe losses as a cost of running your trading business.

I have to remind myself to be impatient with losing trades. I can’t fear cutting a loser too soon. If trade doesn’t feel right and isn’t going the way I expect it to, it’s okay to cut it.

I have to remind myself to not look back at trades that have been cut loose. This look back bias makes me kick myself for not holding a trade longer. This is detrimental to my future trading performance, because I end up holding losers longer that should’ve been cut the moment they no longer felt like good trades.

I have to remind myself that I can always re-enter a trade if an attractive setup presents itself once again.

Dealing with randomness

Establishing a set of trading rules, and sticking to those trading rules has proved to me to result in more profitable trades rather than focusing on profits alone.

If you have a legitimate edge in the market, a set of good trading rules to follow, then profits will follow as result of disciplined trading.

This week was rough for me

I got my ass kicked this week by the market.

It started early in the week, when I bought WORK and SPCE call options, just before the market reversed course on Monday and sold off in the final hours of the day. Because the SPCE options expired on Friday of the same week, I had no choice to cut this loser. Only to see it rip higher Thursday and Friday.

I started the week in a hole, down $1,100.

I spent the rest of the week trying to climb out of the hole, only to make the situation worse. End result, down $4,000 on the week.

How did this happen?

Getting in a hole sucks. Spending the rest of the time trying to climb out of the hole led me to making sloppy trades, overtrading, and putting on trades that I wouldn’t normally make on SPY and IWM that I told myself were “hedges” in case the market sold again.

I forgot what was working.

I forgot how I made $12,000 in a matter of weeks from May 27th to June 19th.

Nothing seemed to work.

Every trade went against me as soon as I entered it. Or so I thought.

Either way, it doesn’t matter what they did.

What did matter was my mindset sucked. I was in a bad mental state, and desperately tried to “undo” my bad trades from the early part of the week, only to have even more bad trades to “undo”.

I wasn’t doing what works for me.

I started trading options expiring this week. I started day trading more even though I very much prefer swing trading a position for 1-2 weeks.

I cut winners too soon (primarily due to short-dated options being traded).

I let losers run on too long.

I added to losing positions.

I put on positions that were not favorable from the get go.

I spent too much time this week hoping for my positions to go in my favor.

Now is a time for reflection

It’s the weekend. My trading week sucked. But I still live to trade another day.

Goal #1 and always: DON’T LOSE ALL YOUR MONEY. When the money is gone, the game is over.

I’m going to take this weekend to reflect on my trades. I will review past trades further and understand what happened and why it happened. I will try to understand what my mental state was when I entered into those trades.

Trading is hard. It’s hard to tell by all the so-called experts all over social media. They’d have you believe they make profits all day. You rarely see is the hard part of trading. The part where it beats the shit out of you and makes you question why you started in the first place.

I share this for anyone else who had a bad day, week, month, or year. It’s not easy. It’s not supposed to be easy. I knew that. You know that. So take time to reflect, take care of yourself, and objectively review those trades and improve the process. It’s the only thing I know how to do.

Back to work here…

Hello friend!

I’m back to working on this blog starting this month.

This is what I’ve been up to

The months of February and March were crazy with the coronavirus and its impact on the market. I was busy most of the time in these months trading, documenting, programming, and continuing the improve and refine my trading processes.

2018 (with emphasis on the last three months of the year) was extremely rough for me. I fought the Fed multiple times on trades and I lost. I was actually looking for jobs in January and February because I wasn’t sure I’d be able to continue trading.

That changed, fast

Volatility in the market took off. I held short positions that profited insanely. Negative gamma had proven to be my ally. Convexity won out.

This extended my runway another 4-6 months at a minimum. It’s been a scary ride but I’m loving every minute of it.

What’s to come

Anything that I’m interested in. I’m currently interested in the following things, in no particular order.

Understanding gamma exposure deeper
Other options greeks and their effects on markets
Higher order options greeks (vanna and volma)
Game theory
Kelly criterion and position sizing
The rise of the carry trade
Federal Reserve operations
The current state of the economy
The current state of politics in the world
Python programming
Calculating gamma exposure from easy to obtain information
Building trading dashboards

That’s just a few I can think of off the top of my head.

Follow this blog to stay updated.

Why you should ask more questions

Asking questions is important.

Why is asking questions important?

Questions force you to think about a topic in terms of what you don’t know. Rather than reading a text or a highlighted passage, and thinking “I got this”, questions force you to search deeper for something else: the unknown.

Why do questions force you to think about what you don’t know?

We are curious people. We like to know the answer to questions. When we ask questions, there’s a natural desire to find and answer to those questions.

When you write questions down about a topic you are learning, you are forcing yourself to read and interpret information from the perspective of finding out what you don’t know.

How can you ask more questions?

Just write down more questions every day. Write down your to do list in the form of questions. Ask yourself, what am I going to get done today? What needs to be worked on first? What are those most important items on my to do list?

Write down questions about a topic you want to learn. Start by writing questions that you want to know the answer to. When you have answers that you are seeking, learning becomes easier.

Writing questions gives your mind something to search for. If you go into a topic with a bunch of questions, personalized to you, you will learn a subject much faster.

I guarantee it.

You are your own worst enemy

It’s easy to blame others.

It’s hard to blame yourself.

It’s easy to blame things out of your control.

It’s hard to blame those things that are within your control.

Rules can help you make better decisions. Your goal should be to follow your rules. Not making money. Making money should be a product of following your rules.

Don’t think of yourself as a gamblin’ man. Think of yourself as a risk manager.

Make smarter bets through time. Don’t trade too big in any one position or in any one day. When you place your bets is just as important as where you place your bets.

Did the Federal Reserve Kill the Volatility Trade?

On October 11, 2019, the Federal Reserve announced they would begin buying Treasury Bills in an effort to ensure there are “ample reserves” in the banking system through the end of the year.

fed treasury oct 11

On October 11, 2019, the Volatility Index (VIX) sat at 17.4. Today on November 26, 2019 the VIX has recently closed at 11.5. As you can see from below, it appears as though this not-QE program that is “organically” growing the Federal Reserve’s balance sheet has effectively killed the long VIX trade.

fed vix chart

The case made that supports this idea is that investors are engaging in more risk on behavior, because they are basing their decisions based on the Federal Reserve’s prior balance sheet expansion programs (QE 1-3).

Because the Fed is purchasing T-bills, they have eased some of the money market pressures. Liquidity in the market has proven to be a positive catalyst to the market.

Why do I believe this?

It can’t be the trade deal.

That’s the only other source that has been moving the markets higher according to many daily stock market new reporters. And I don’t believe these markets are pushing higher on hopes of a trade deal.

I think the Fed’s easy money policies have once again eased tensions. For now.

A lesson to me

This whole scenario has taught me a valuable lesson about position sizing. I’ve learned to not be so overconfident in my predictions.

Every trade made is a small bet. Each bet will abide by the Kelly criterion.

Never go all in.

Grow your money slowly and strategically.

Live to trade another day.

Read

Barton_options on Twitter has been a great resource for me to learn more about the Federal Reserve operations and how it relates to the Treasury and the overall economy.

He recently wrote about this in a newsletter you can read here.

I’m always learning

I like the put predictions out there for the purpose of learning.

I don’t want to be seen as some prophet, because I’m not. I’m wrong a lot of the time.

My goal is to put predictions out there so that I’m accountable for them. One effective way to find out your biases is by putting things out there to be scrutinized.

Your scrutiny, insights, or questions are encouraged because I know they will help me (and probably you as well).

Cheers,

Court