Monday, March 26, 2012

What's more important than risk management of your capital?

No trades today, still taking it easy.  I did have some SIM trades on Friday for about +8 ES points.  Although I treat SIM trades the same as live, there's still a difference with fills, so I'm not really counting those at this time.

EURJPY update
And from the hindsight trading perspective, the original $EURJPY long trade on 3/23 from 109.01, had I not placed the initial stop so close and brought up the stop so close, which then stopped me out the next day, the trade would be looking pretty good right now (up over +150 pips).  Lesson learned -- make sure I keep the stop below the trigger bar, and don't touch it for at least 2-3 days.

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Managing your psychological capital is MORE IMPORTANT than managing your capital risk

Over the weekend, I happen to watch a video from Denise Shull, who has recently released a trading psychology book called "Market Mind Games."  It has received some strong reviews, so I'm looking forward to reading it soon.

Her message created one of those a-ha! moments that hit home, especially due to my mini-meltdown last week.  The information wasn't anything groundbreaking, but based on the timing of the message and how Denise presented the message, it really got through my thick skull and rang some bells.

One of the studies she references in the video is from Seo and Barrett, which in summary, says "investors who were both the most emotional, but also the most aware of their emotions were the most successful."

Here is a partial transcript from the video clip.
If you manage your psychological capital better than than you manage your cash capital, you will have a better year than last year. 

Research shows that when you are tired, you will mis-perceive risk. You think you will see one scenario, and it's not what you're looking for.  And the research is overwhelming convincing on this.

So if you get a lousy nights sleep, and you're tired...have a fight with your spouse, your best risk management tool is not to trade.  I also know it's the hardest thing to do.  But this is really a hard business.  And you gotta learn to do some hard things. 
The place to have the discipline is managing your psychological capital. 

So instead of trying to apply discipline to not having the emotions, and just doing the trade and taking every trade, apply the discipline to understanding where you are on your psychological capital scale.  And if you're tired, or if you're sick, or if you're aggravated at your wife, child, or dog...

DO NOT turn on your order entry system.  It is a very simple risk management tool. 

Now everybody wants to trade.  But there are always other things you can do.  You can review last months performance, you can read a book that you've been meaning to read related to trading, you can practice something in simulation. 

But DO NOT turn on your real account.

And just think, if you just take that one tip, at the end of the year, how many of those trades that you wished you wouldn't have taken last year, would you not have traded? 

And imagine psychological capital. If you don't take that trade, because you were tired, and so you don't have a crummy day where you lost a $1k, or $5k, or half million don't have that crummy day, where are you going to be the next day? 

You'll going to be better off in every way! 

First of all, you're not going to be so mad at yourself for taking the crummy trade, beating yourself up, why did I do that again.  So you won't have the psychological capital deficit that  you just gotta recover from mentally and emotionally, you also won't have the cash deficit.

So the next day, you're going to be like, you know what, I actually handled that well.  I did what I was supposed to, like an athlete, or a singer who preserves their voice, or preserves their body.
It's the same thing, you're preserving your mental, psychological capital.  And when you do that for a day, you're going to come back the next day with much higher odds of making better decisions.
The point about taking trades when you're tired, angry, annoyed, etc., is so true.  Those "oh this little loss from this mediocre setup won't hurt me..." really does starts to add up, and does hurt your P&L over time.  Death by a thousand cuts.

Today, I didn't log into my live account.  Little by little, I'm learning to build up self-control and self-awareness over my actions and my emotions.  Step by step, I'll continue to make small improvements every day.

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