Keep Calm and Don't Move Your Stops.....

A little risk management saves a lot of fan cleaning!

The Purpose of Life is Joy!!

Fragility

My friend (unnamed trader) has been talking about fragility. I know he borrowed it from others but has applied it to trading. It has gotten me thinking about the different aspects of trading that cause fragility. And what exactly is fragile in my trading.

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.

  1. 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. 
  2. Trade only when it makes sense....I frequently ignore this. If you can't figure out what's happening, don't trade. Period. 
  3. 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. 
  4. 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. 

6 comments:

  1. I know its Friday night and I'm supposed to be out having a good time...but instead I'm sitting in front of the computer (after having done it all day) and reading a trading blog? Get a life Chuck!
    OK, I found some interesting stuff at your blog. I like your 4 points above. It's all stuff that I live everyday in real-time. I mentioned before that "trading is just a mental exercise....". To finish that statement add: "....to see if you are capable of following your own rules". That sounds like what you're saying here. You mentioned on another tab the difference between being paid for your time, or being paid for your actions. Traders are paid for their actions of course. I know I can work all day but its even possible that after 8 hours I could even lose money. What the hell kind of job is that?? But we both know the flip side. I can also work for 1 hour and make 8 hours pay. To me the time applied is very important too. There have been innumerable times I will look at the chart and see a great trade that meets all the rules, but yet I made nothing on it because I got bored earlier and went out to mow the grass. I ask myself then "What the hell am I even here for then?" Trading is about taking advantage of very specific opportunities that can come at almost any time. You have to be there. I mentioned my daily goal is to "be there all day and focus". To me this is a J-O-B and has specific hours. I trade 9:30 to 12:00 and 1:30 to 3:20 (ET). That's my job. I can't take winning trades that I am not there to see. Focus and Patience is EVERYTHING. On the wall next to my desk I have several favorite quotes. One says "Everyday I face brilliant opportunities disguised as challenges". You seem to be a pretty smart guy who "gets it". I like that Panda Warrior theme too. I don't have any young kids and so I had no idea what that movie was about. But it makes me (a 59 year old) want to go see it!

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    1. I don't disagree with the idea of being there all day like a normal job. But for me, something called Decision Fatigue sets in and I start making poorer and poorer decisions. So in my case, eliminating this tendency means trading at my optimum time and be done for the day. Its working so far, I don't intend to change it any time soon.

      The movie is called KungFu Panda. Its a great story for both kids and adults. I watch it every so often.

      If you're reading some of the other pages on my blog, take the ones on the trading method page with a grain of salt. Those ideas work and I still use them but honestly, I've simplified things a bit since then. However, the daily bread page is very much how I view things.

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    2. Here's a slide show I did about this idea. You'll have to copy and paste it into your browser. Links don't work in the comment section.

      https://docs.google.com/presentation/d/1ZjfIfFRiP9hKQlKQVCBIptm771DwpU03kLIBoOXNm50/present?slide=id.g29aa501a2_159

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    3. Thanks for the link to your slide show. It's very good. So what am I doing responding at 9:00 Saturday morning? Well, its routine for me. A few quick comments:
      1) I agree with the idea of quitting when fatigue sets in. I try to fight that concept every day though. That's why I have a long lunch and quit at 3:20, not 4:00. I start my homework for the next day at 3:30. 2) Your "Buffer Days" is sort of what I'm doing right now. I have scheduled "homework-review" sessions on Saturday and Sunday mornings. I get up at 6:00 am each day and pretty much go straight to the computer to get them done. I've been doing this for years. I absolutely believe that "Consistency creates success". I review the same screenshots and notes over and over and over. Beat it into my head. 3) "The mental moment" I agree with completely. 4) "Stats". You keep record of MAE. I keep record of PPP ("Points past pain"). Its the same as MAE. I have over 10,000 records now going back to 2007. My setups have not changed since 2007 and so I know what to expect. OK, time to turn off this computer and get on with the weekend. Have a nice weekend PW.

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  2. Just saw the presentation - Nice!

    Taleb's book is seminal. It is even better than Brett's last book and I would put it almost in the same level as Ken Robinson's "Out of our Minds" in its mind blowing revelations about ourselves

    Understanding our fragility opens up everything...you can connect the dots like nothing before. All BS retail trading paradigms that one hears endlessly simply don't matter.

    At that point in time, Mark Douglas' book no longer needs to read, you already know what he is going to say - at the core of your being, you "get it".

    And realize there is no finish line, the journey is the end.

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  3. Thanks....I'll need to look up Ken's book. Haven't heard of it yet.

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