Don’t Talk Up Your Trading Position

Posted in: Basic Trading Strategies, Day Trading, Trading Article

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Another day trading rule for the list would be that you don’t talk up your trading position. What’s meant by this is that you shouldn’t be trying to find reasons to stay in a position when there’s plenty of information available to suggest the market might move against you. You must endeavor to remain unbiased in your interpretation of market movements.

Blinkered views…

When a trader is looking for information to support the idea that the market will continue in the direction that they are positioned for, what tends to happen is they will over-emphasize supportive information and under-emphasize detrimental information or even worse, ignore it entirely. So it’s not just about finding supportive information, it’s about artificially skewing the reality of a trading scenario.

= Poor reactions

So not seeing the full picture is obviously not going to be especially helpful to a trader. Before a trade is taken, perceived positive information can of course be something that gets a trader into a position more readily than really they should. I once knew a trader who would set his idea for the week and try to only be short or long based on it – needless to say, he frequently struggled when either his direction was wrong or the market wasn’t moving directionally at all.

But the real danger of blinkered trading views is when you are already in a trade.

At the bare minimum, if you’re not expecting adverse price movement, then when it does happen you probably won’t be ready to act on it – even if the signs were already there. At worst, filtering out negative information can often lead to a trader letting a winner come all the way back or even not taking a stop loss at all.

Psychological impact

The problem probably isn’t going to be something that has a lasting impact based on one or two trades (even if there are plenty of traders who seem to be willing to take massive losses as a percentage of their accounts!). The lasting and damaging impact when you talk up your trading position, is a psychological one.

Losing trades can make you feel let down by the market and this is something that leads to a mistrust in what it ‘intends’ to do especially when you experience big losses only to see the market immediately reverse course. The other issue is of course self-deprecation. In hindsight, market action is frequently far easier to interpret and obvious indications of a reversing market can lead to you feeling very inadequate in your trading ability.

The other danger is that winners can serve to make you act more like this in the future. The trader that has blind belief in their own judgment is galvanized when they are proven ‘right’ – so much so that they are at risk of refusing to believe a market that’s moving heavily against their position in future trades and they don’t take their stops when they should.

Big days can highlight big problems

Think of the recent market behavior. Over the last week or so we have seen a few large down days in stock markets. So much so in fact, that perma-bears are probably getting ready for a really big move lower in the indices. And it’s certainly plausible to believe at least in the very short-term that there could be some follow-through to the downside.

So think of Friday 17th October – the FTSE futures had retraced part of their move lower from Thursday but had backed off a bit from its high at 6255.0 which also was a decent swing high. You have the idea that you want to take a short and therefore look for a signal to take after a lower high is put in on a 15min chart with a view to running a wide trailing stop behind the 50EMA (yellow).

FTSE_15min

Cross-over_short_trade

So you get your reversal setup short (cyan) and you take it. It gets to its full target but then starts to move back towards its stop.

Changing_FTSE_stop

But as you’re sure it’ll go lower, you ignore the signs that it’s failing to sell off to a great extent. You ignore the BoE speaker talking about rates (amongst other things) and you’re eyeing up that big move up to the left of the chart retracing. So you decide to give the trailer some more room and then some more. This is how the day ended: –

FTSE_at_close

The flip side

Trading is like life – everything’s a balance. The flip side if you don’t talk up your trading position is of course talking down your positions. It’s well worth a mention here because there are a significant number of traders who have the tendency to do it. And it can be a BIG problem.

It can lead to not taking trades at all and if you’re not careful, seeing would-be winners play out can progress to the big FOMO issue (fear of missing out). In a trade, it can get you to cut both your winners and your losers short. Taking a winner too soon is an obvious problem, but not giving a trade room to breathe with a suitably sized stop is not always something that people consider – and this is where the whole “death by a thousand cuts” idea in trading comes from.

There is no hope

This basically all boils down to hope. Hope that you’re ‘right’ on a trade and that you know what you’re doing. Hope that you’ll make money on a trade. But it’s indicative of the issue at hand – trading is not about hope. When you trade, the outcome of a single trade should never impact your account that much – trading is about staying in the game for the long haul.

Don’t Talk Up Your Trading Position

If you have this issue or the opposite of it (where you always think you will lose), I urge you to consider the following: –

1)      The outcome of a single trade doesn’t matter – think in sets of trades. The key thing to do on a single trade is to follow your plan so that over the course of 30 trades for example, you can get a better idea of whether the strategy is working well or not. Ensure you take all planned stops – for losing positions as well as trailing stops on winners.

2)      Understand that you don’t have to know what is going on in the market at any given moment in order to make money. The key is to execute properly and to manage your risk effectively – even when you have a strong belief that you know where the market is going to eventually go.

3)      Have a checklist to refer to. Keeping track of various things as the market auction progresses is very useful. But the trouble is that if there are just some things in your head that you try to look at throughout the day, then it’s easier to filter out the stuff that contradicts your ideas and trade direction. A checklist (that’s not so long that it’s impossible to follow) forces you to acknowledge all relevant information.

 

Trade well.

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Coach James

James began his trading career nearly a decade ago, learning his craft in fixed income derivatives. These days, he predominantly day trades index futures using auction context as the vital ingredient to his approach. James is a firm believer in the importance of trader psychology and how it can make such a monumental difference to how well a trader performs.

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