BarroMetrics Views: Ebb & Flow Management
The past two months have been great for my bottom line. In my personal trading and fund management, I had a good return in April and May is the best month in 30-years of trading. Yet on Wednesday, I cut all my open positions, even though I believed the positions would probably continue in my favour.
Why? The answer lies in how I manage my Ebb and Flow.
There is no question I am in a Flow state. Most of my decisions are correct in the sense that I correctly interpreted what the market would do; and even when incorrect, I exited positions with minimum loss. Let me give you an example of what I mean:
- My win rate for May was 80%
- My Expectancy return per trade was: US$5,500.00
- Since I expect about 300 trades pa, my return would be: US$1.6M
- My Target outcome for 2010 was: US$250,000
Given the above, many of my friends are saying I should press on – but for me, I know it is time to stop.
I am seeing the little signs that warn of a ‘buttock-slapping loss-lesson’ around the corner:
- I am catching the thought: “God, I’m good!” (rather than the usual: ‘I am reading the market well’)
- I find myself tired and starting not to enjoy the process of trading, and finally
- I am starting to get sloppy with my record keeping –
Normally I follow a set pre-entry post-entry process:
- a) Enter the risk
- b) assess the reward to risk
- c) assess the first 1/3 exit.
In the last few trades, I have skipped the written process for a mental one.
Not good – all signs that I need to take a break.
Remember that even when trading at optimum effectiveness, when the flow state starts to ebb, the first loss will be on maximum exposure (I increase position size in Flow State). So if I am trading below minimum effectiveness, that first loss will be a beauty – that I have learnt through experience. So what I do know is watch for signs that my Psychological Capital (to use Denise Shull’s term) is on the wane and I take a well-deserved break.
There is a cost, of course. Sticking with it through will power may sustain the Flow State longer and when I return to trading, who knows where I’ll be in the spectrum of Flow to Ebb State? But I am happy to trade that for taking a break.