I've identified two areas that are fragile. One, my stops can be fragile. This might or might not be self explanatory. The short explanation is that stops are placed in areas where market makers can easily access them and add my contracts to their positions. As a trader, my job is to be anti fragile when it comes to stops. This demands ruthless dedication to risk mitigation and management. Both in terms of size but also in terms of what is considered a "setup". Case in point here...if you take a trade that's not a "setup" per your rules, you are automatically placing your trade in danger of being stopped out....the main reason here is NOT mechanical danger but what constitutes number 2; emotional fragility. You are not confident in the "setup" thats not really a set up and so you put the stop in the wrong place and even if the trade starts to work, we wimp out and close at to small a profit with a sense of relief to just be out of the trade.
Emotional fragility is simply not following your set up rules or taking to much risk while taking a legit setup....this causes a trader to place the stop to close.....which leads to mechanical fragility.
And now the trader is double jeopardy; both the emotions and the mechanical's are in trouble.
So what leads to anti fragility?
Correct emotional behavior in the context of correct mechanical behavior is essential to anti fragility. Unfortunately, correct emotional behavior comes before correct mechanical behavior.
But there are certain things one can think about before and during trading to mitigate the emotional fragility we all bring to trading. This can help with correct behavior but won't fully correct emotional fragility in its entirety. However small wins emotionally and mechanically can lead to long term behavior modification.
What do I mean
Several things come to mind.
- In live trading, live by the moto, "trade by exception only". Meaning that all potential trades are filtered through the prism of your rules. This means absolutely no trades unless they meet most of your trade filters....this could be time frame alignment, indicator alignment, etc. Trouble is, most traders can find this kind of confluence in hindsight but in real time, they are usually to bored or anxious to be in the market to wait for the confluence of factors that allow you to take a trade. I know this is an Achilles heel for me.
- Trade only when it makes sense....I frequently ignore this. If you can't figure out what's happening, don't trade. Period.
- KNOW the risk beforehand. If the trade is perfect but the risk is to much, size down to pass on the trade. I often take the risk anyway....and to be fair, a lot of these work out. But the smart thing to do is pass or size appropriately.
- Greed often leads to fragility. What I mean is this: A trade is working. Price reaches an area where you know you should probably take profit. It comes back on you and turns your winner into a breakeven trade or worse, a loser. What happened here? Greed said it would keep going. Most of the time it doesn't. Most of the time, if your plan says get out, you should. There are of course those times where its better to hold but the vast majority of the time, price honors levels at least for a while. Now emotional fragility is created.....the emotion of greed sabotaged a good trading plan. This in turns sabotages future trading plans. You no longer have confidence in what you're doing. You second guess, you question.....you back test thinking some other indicator or plan would have gotten you out for sure there and logged a nice winner.....but the ugly truth is this....you had a plan that worked and you didn't follow it. Anti fragility behavior says exit the trade according to plan and let the rest go, even if it runs another 100 ticks in your favor.
I think these 4 things will go a long way toward introducing anti fragility into a trader's every day results.
For one thing, doing these four things create confidence that you can do it again....and doing the next time builds on that and over time the idea of waiting for confluence begins to be the norm instead of the exception. This alone creates anti fragility. If the risk is to large and you pass, you know you did the right thing even though the trade worked and your stop would have been safe, still passing on the trade is the correct thing to do....and this creates self trust.....ensuring anti fragility is built once again.