Why do I not put stops in?

(This segue from Losses expands on above question)

We are told to always have stops in. So why do I sometimes not put stops in?

My answer has been broadly the same but with small variations:

  • I don’t want to get stopped out when I am ‘broadly’ correct, meaning that whilst I might not get the short term direction exactly right, I do get the bigger picture direction right.
  • I’m not sure where the market will stop before I am right
  • It’s not looking like moving against me yet so no need to put one in yet (because I’m right)
  • I don’t want to ‘pay’ to get in twice when the price jumps up through the level and the collapses back down again (i.e. makes a false break either up or down) only to push up in the original direction anyway (I was right all along).
  • I don’t want to have a wide stop that chews up lots of my capital, gets hit and then I’m out anyway.
  • I don’t want to miss a move by waiting for the market to get to extreme levels before acting.

As you can see, they are all versions of “I don’t want to get stopped out”. Recognising that I was trying to ‘explain away’ why I was not putting stops in, was a very important step for me. It meant changing what I was doing.

I just went through so many journal entries where the price looked good then moved against me, eventually turning into a much bigger loss and making me feel really shit for days for multiple reasons. One of the answers by Ed Seykota in Market Wizards was that losing traders could not turn themselves into winning traders, that was something winning traders would do.

I realised he meant winning traders make changes and losing traders don’t. Winning traders keep on making the changes until their overall approach is successful, i.e. profitable.  By forcing myself to put stops in every time I had to accept that I would have to wait for better risk/reward opportunities than I currently was. I would have to lift my standards.

It reduced the number of trades I did and also reduced the ‘action’, but improved the quality of the trades I was taking.

This had the expected effect of reducing volatility of my earnings but also had some unexpected effects. I realised some of the markets I was watching had nothing happening and I was probably forcing trades.

It is something like the concept of “stocks in play” from the book by Mike Bellafiore called One Good Trade. He says (in more detail) to identify which stocks were going to have news items, numbers out or reasons to move that session, identify their key technical levels which they could react to and just watch those stocks. The problem for a lot of traders was they were watched stocks which had no reason to move one way or another.

Given I could summarise some markets in one or two words because nothing was happening, I started to monitor more markets including those which I had no prior experience with.

I had the time, but I didn’t have the experience in those markets. I asked myself, should I be trading these markets? Should I be here. Which made me think, well what justification do I have to trade the markets I currently do?

I looked at the markets I currently trade and when I was totally honest I have no informational advantage in any market I trade. I just don’t know the right people who are far enough up the information curve to be ahead of a short term price move, I don’t know farmers in ags or softs, builders for lumber, oil producers for oil variants, government officials for government reports etc. etc. etc.

I do know how to read the big picture economic outlook in some ways and compare points of view from different sources, so I have a rough guide . I know how to read momentum i.e. comparing a story to the price action following the event and assessing whether that was a bullish or bearish response. I also know how to read charts and have covered a lot of the technical analysis although I don’t use all of the methods I have read. I have read quite a lot about risk management and position management. I have also studied

So in short, my approach is relatively generic or ‘market agnostic’. To look at it the opposite way, I don’t actually need a huge amount of specific preparation to start trading a market especially if I have traded a related market. This is within the framework of having completed a fair amount of background reading in financial markets, undergraduate in economics, a masters in finance and worked in various front office roles for banks and brokers over the last 15 years.

What I know my edge is not is:

‘time sensitive information’
‘inside information’
‘computing power’ whether through data crunching, running complicated algorithms millions of times or high frequency trading
Given I had not counted my success rate, I could not be sure whether I was making good decisions or not. I was not doing enough analysis to give me confidence that if I managed my losses, at what rate would I grow my capital. I didn’t know if I was hitting a 3x 4x 5x or 10x winner 1 in 5 times or 1 in 20 times. In short I couldn’t complete the fundamental equation using real life data. So the next step to becoming a winning trader was to start collecting that data.

Most trading platforms can provide you with a trading history and summary data to you can check how many winners and losers you had. It’s one thing looking at a generic report but it is quite a different experience to go back and walk through each trade. A more in depth way to do this which provides valuable context to how you felt and why you might repeat the same mistake or behaviour is to check out the individual trades on a chart, one by one. This is a lot of work.

I use daily charts because I trade an intermediate time frame of a few days or a week up to a few months. I can’t trade smaller time frames because I cannot guarantee I will be there to make an assessment more than once per day. Given my other time commitments I am just not going to be in front of the screen to sit down and cover every market I trade more than once per day, every day. Some days I can, but not EVERY DAY.

The distinction is important because if I want to deal with FOMO, I need to be settled with the fact I am only trading those markets but that I will give myself every opportunity in those markets. When I don’t turn up, I miss a potential opportunity, I say to myself I could have been on that, it could have been my big winner for the year, beat myself up about commitment/winning/making money etc and THEN take a trade which is not really there. A sub-optimal trade which just makes things worse and now I am really chasing money.

Realising what situations cause FOMO in me is very important. There are strategies I have found which work for me to reduce this. The strategies are simple but the more critical step was realising or being honest about which situations were causing FOMO. Journaling again was the key, because it wasn’t always my surface explanation but maybe came out as the underlying reason 3 or 4 questions in to my writing.