Deja Vu All Over Again

In 1980, I sold my legal practice and turned to full-time trading. At the time, Gold was in a downtrend, and I seemed to pick to go short the precise day when it would correct up for 2 to 3 days. I compounded the loss by stopping and reversing (so from short, I was now long, usually at the top of the rally). Then as Gold resumed its downtrend, I’d get stubborn and add to my longs until I blew my account.

‘Dumb’ is the kindest word that I can use to describe that type of trading.

On Friday, I saw shades of deja vu. I was short the S&P with 150% of Normal size. I felt at acceptance above 1225 would call my underlying (& bearish), scenario into question. Moreover, the acceptance above 1225, would call for a move to above 1290.

So, when the ESH2 rallied from 1216 to 1225 on what appeared strong volume and range, I stopped and reversed. I did reduce my long position size to 50% of normal size.

Then as the ES dropped off, I again stopped and reversed at 1212 with 150% of normal size (effectively re-entering the original position at a less advantageous price).

Comparing 1980s with 2011s, I see similarities and differences:

• Yes I did get suckered into a ‘bear trap’.
• But rather than blowing my account as I did in the 80’s, my total losses for the night, including the less advantageous price of 1212 was 0.88% of capital. That is quite a difference. And
• Irrespective of how the short trade at 1212 turns out, I know I executed the re-entry based on my view of the market (strategy) and plan for the day (tactics). In other words, rather than reacting to my ‘fight or flight’, I applied my predetermined strategic and tactical plan.

So, you could say I have managed to learn something since 1980.

For me the key lesson is:

I know that I’ll probably be suckered again in the future. But I also know that if I manage my risk, I’ll keep coming up with a green bottom line. And a green bottom line (i.e. profitable trading) is the name of the game, is it not?