Thinking ‘Three Moves Ahead’ VI

This blog on ‘planning’ and luck’ will be the last in this series. Recall that I am dealing with the role of luck and planning in trading/investing.

Bob Rice, in “Three Moves Ahead”, takes the view that we give ourselves the opportunity to ‘get lucky’ if we act in accordance with a plan. Today I want to consider the nature of that planning.

In trading, planning is based on three pillars:

  1. Our philosophy of trading. Mine, I adapted from Trader’s Vic. He and I share the same foundational premise – ‘preservation of capital’. This first principle permeates my approach. For example, I am happy to have a lower ROI for a smoother equity curve i.e. I prefer to make 25% net pa with an average draw down below double figures than make 35% pa with an average draw down of 20% or more. Another trader may have a larger risk appetite and opt for the latter.
  2. Our generic (strategical) plan. This dictates the types of trades we’ll take. For example:
  • Except in some rare cases, I prefer to enter on correction and retests rather than breakouts.
  • My generic plan determines my normal risk- risk defined by my psychological risk profile and the statistical data of returns.

3. Our tactical plan. This plan executes our strategy on a trade-by-trade basis. It has 3 parts: entry and initial monitoring, subsequent monitoring (abort), target exit (planned conclusion).

Yesterday Baz wrote: “You can make some serious money in this business but you really must master yourself first as trading will expose every weakness.”

I am in total agreement. To master ourselves, we need two key traits: self-awareness and self-management. While the two traits overlap, they are separate and distinct.

It took me forever to learn the skill of self-awareness (my hubris and ego kept getting in the way). Whatever success I have in this area was the result of weekly therapy sessions with Dr. George Lianos (Sydney). George showed me that if I was to succeed, I had to open myself to those areas that I would normally deny, distort and generalize; he showed me I adopted these defenses so that I would not have to accept that ‘I was wrong’ or ‘I was doing something that was leading to my failure’. The key words being ‘wrong’ and ‘failure’.

An example of what I mean: this memory is as crystal clear today as it was when it happened some 20 years ago.

In those days I was trading using the RSI – normal stuff you see bandied around today. The difference is we had no computers. And since I was day-trading, I drew my line charts by hand. Chrisy, my wife, would watch the Reuters green screen for the 30 minutes closes; I would draw the chart, calculate the RSI and draw that on the chart.

One evening, Chrisy asked me a question to which I could not give an answer. But rather than admit to not knowing, I bluffed a reply even though I knew I did not know the answer. To avoid being ‘wrong, I denied.

This human tendency to protect ourselves from pain stops us from learning. If we can admit that we are the authors of our failure, we have taken the first step to our success – we have acknowledged the problem. This is akin to the first step in AA – admit the alcoholism. Once we know we have a problem, we can look for the solution.

Self-awareness is a trait we need to consciously adopt. I found that, with time, self-monitoring does become easier but it’s very easy to slip into denial, distortion and generalization. Hence I am constantly on my guard. Now, let’s turn to self-management.

The fact that we admit to having a problem is but the first step. The next step is to execute. Here I have found that preparation, especially visualization, is the key to success. Preparation reduces the probability of impulse trades. Last night provided a great example.

My structural stop for my ES M8 short was acceptance above 1406.75; my price stop 1427.75. Because of where the market was trading and because it was FOMC, I placed my price stop at 1406.75. If the FED did something unexpected, e.g. cut by 0.50% rather than 0.25%, the market would blow thorough 1406.75. Given the fact that my trading has been in an ebb state, I was unwilling to chance that.

My preparation included scenarios where the market would move above 1406.75 and provide a Market Profile rejection extreme. I created a price range where I would re-enter, depending on the high achieved after FOMC. I did get stopped out (bought almost the high) and re-entered at 1400.50.

With hindsight, I’d have been better off placing a stop at 1427.75 and monitoring the activity at 1406.75. But that is with hindsight. I reviewed the decision in my review session today and decided I made an acceptable decision. Based on that decision, I made a plan and I flawlessly executed the plan.

The trade was a loss. But on a rating basis, I gave myself the full 3 points for my entry and exit. (For the rating system I use, see http://tradingsuccess.com/blog/the-matrix-249.html). Self-awareness needs self-management and rating system in the quoted entry provided a statistical measure to measure my self-management.

Well folks, that concludes this series. Happy May Day!

4 thoughts on “Thinking ‘Three Moves Ahead’ VI”

  1. Wish to add my story,Ray.

    I am sure many had a tough time to trade the past week, especially when after the FED news, the markets still behaved the way it did, not going our way.

    As to managing my trades, I did put in my structural stop at 1406.75,which was hit. I prepared myself to take a loss, having entered a high risk trade.

    I did toy with the idea to re-site the stop but I reminded myself to be disciplined. After all there will be another day to make it back.

    Perhaps, before or after Non-Farm Payrolls tomorrow.

  2. Hi Ray,This is a really interesting article.I never cease to be amazed at the lengths you have gone thru and the knowledge you have aquired,to get to where you are today.Well done.The market has a way of humbling the best laid plans of mice and men.I found either, i lose the ego or the market is going to bash it out of me.I still draw some of my charts by hand,perhaps its the visualization,you mentioned,that seems to help me.Also i found many times fundamental announcements seems to make the technical analysis come true for example on Fib numbers at times. And i hope you finally told Chrisy the truth!!! best wishes Baz

  3. Hi Baz

    Thanks.

    Sounds like you have also been through a process. Amazing how often fundamentals coincide with technicals.

    Yes I told Chrisy the truth many years after the event.

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