Don’t Avoid Them…Manage Them

So you have decided to to trade a strategy of some sort. You have made the choice that you need some rules based plan to guide you in your trading. Trading by what you feel just hasn’t produced the results you expected. You have done some work and now have some rules and context in which you would like to place trades. You hope to one day have this automated but that just isn’t possible right now. So you decide to go ahead and punch the keys yourself to execute the strategy. You have high hopes and are confident you are making the proper decision. So you give it a go.

About two months time goes by and some frustration has set in. In going over the last 40 trading days data your live trading looks quite different from your walk forward results. Why? Hmm, it seems you didn’t take all the entry signals your rules generated. Also a few trades you exited a bit earlier than the profit target or stop. At the time these all seemed like reasonable decisions. As a matter of fact at the time they seemed down right smart. Yet somehow I made less than I should of or lost more than I should of according to the strategy results.

Sound familiar? I am quite sure it sounds very familiar to many traders. Yes, I’m sure it hits quite close to home. In your effort to avoid a loser or lock in a small gain that felt like it was being taken away you managed to make less or lose more. You did the work. You know the math is in your favor on your strategy. You are confident it can work, and still you messed it up. All because a trade felt like it was going to be a loser or not hit it’s target. See the thing is your strategy is designed to be executed and managed not curated mid stream. Not a trader that I know fails to execute an entry signal because it felt like it was going to be a winner. Traders can’t wait to hit the keys on the trades they believe will be a winner. Nope, it’s only the signals that fell lousy. They feel like sure losers, so we decide to pick and choose in real-time. The worst part of this whole scenario is that the ones that felt bad that you failed to execute turned out they would have been some of the best winners!

You took the time and you did the work but you don’t trust it when you act like the above. The work you did off the screen is likely to be better than your decisions in front of the live ticks. Assuming you didn’t design a curve fitted over optimized strategy. So your job is to just execute and manage. Got that..execute and manage! Your effort to avoid a loser only caused you to avoid some nice winners. That’s the math that can’t be made up. Yes, sometimes you did avoid a loser and it felt so good. You felt so smart. Yet it cost you money. This is your business not your hobby. It is not about feeling good and being right, it is about making money. In trading what feels comfortable most of the time has very little edge in it. The biggest edge comes from being able to get comfortable being uncomfortable. Quit trying to pick winners and avoid losers. Take the signals a design a management plan that allows the math to work out. That’s your business.