As I've recently shown the good, I will also show the bad. Very tough day that my personal strategy should basically go red on no matter what, might've been the hardest day in a couple of months for me.
I ended up losing -19.06 Adjusted R.
A couple of thoughts but mostly lessons in the form of leading by example.
Diagnosis
1. Overall: Objectively I would always end pretty red today with my ruleset and that is okay!
2. Mistakes: I made 1 technical execution error which is unusual, but not that important and did lead to additional loss for no real reason.
2a. The Important Mistakes:
-I circumvented my position max losses in 3 instances because I felt that #1 the setups I took failed, but had secondary setups that I think are much better quality and convinced myself the win was > the lockout.
-I was more risk-seeking in allowing C grade ideas, I took one trade that was low probability from the start that I would normally filter if I was less confident from a winning streak.
All-in-all that totaled up to 10.09R of Additional Loss.
So without mistakes I would be seeing a total daily loss of -8.97R versus -19.06R, much more manageable!
Ok let me first address potential criticisms/concerns and then we'll get to the actual takeaways:
Criticisms/Concerns
1. "Max loss did nothing for you, so much for risk management"
-Humans make mistakes, I always model in failure (accounting for slippage, over-the-top losses or additional loss) when I think of risk as a whole but the max loss actually serves to counter one specific pitfall for all traders, which is to ADD TO LOSERS/HOLD ON HOPING and trying to bail themselves out eventually. This is one of the most significant reasons why traders blow up in general, this is my own experience and research of watching countless traders exit the game over the last 8 years. By simply preventing this motion, you actually create a moment of detachment that allows for a moment of reflection and EVEN if you ignore this moment you will still only lose multiples on your existing position, not the exponentially greater amount you would by doubling down etc. Coupled with very disciplined position sizing, this should never cripple you (I've taken 5-10x multiples on risk in unavoidable slippage situations which are extremely rare) and it has not been a big deal. It sucks to lose a multiple but when it's out of your control, it's just like getting hit by a force of nature, you can cry for a bit but ultimately your responsibility was simply to manage the aftermath i.e. getting out, which I do.
2. Is it a big loss?
-This is very normal loss for me and the risk is elevated when there are outlier amounts of activity because each trade gets it's own allocated risk to let it work in isolation. Unless the stocks are highly correlated like all attached to one sector, generally it's good to scale your risk parameters to meet the demand. For example if your average amount of tickers traded per day is 3 and then you encounter 6 then naturally your max losses will scale up to compensate. I have a lot of experience with this during COVID and I don't shy away from risk but rather embrace it because that attitude allows for outlier winning outcomes as well.
3. "Systematic and you made mistakes?"
-Yes! Humans make mistakes and secondly I don't identify with the same definition people do when they use the term on X. I consider systematic thinking as a way to create more "if/then" protocols to speed up decision making and to achieve desired outcomes far more consistently. I think of its utility as a supplement to my skill rather than a full-suite algorithmic or immovable strategy.
Takeaways
1. I know that the human psychology cycles between fear and greed by way of the natural ebbs and flows of the market. In such cases we often need reminders in healthy doses of pain in order to recall the importance of rules or to reinforce discipline. I personally anticipate these types of things which I'll talk about how I address them:
1a. I wire out frequently using the systems I've outlined in my video on youtube here (Really important to watch/read): youtube.com/watch?v=srO8WB and in my blog: brianleetrades.medium.com/some-things-ne
1b. As a result of wiring out consistently, I am perpetually furthering the divide between myself and risk of ruin. My net worth and trading income is taken off of the table and into a reserve. I harp on this a lot but these kind of days really do not bother me at all anymore because I've laid out these systems ahead of time.
1c. This adherence to a wiring process limits my exposure by reducing the incoming risk that I allocate to new trades with a lesser equity balance on the account which prevents taking substantially larger losses after winning streaks or outlier gains... this is the number one prevention tactic against Volatility drag and geometric losses that people literally never consider when growing... these are two natural forces that will trail your success whether or not you know it and have major consequences, look them up! Typically people don't realize that the $ amount in the account does not actually reflect the absolute nature of % drawdowns which do not care if your account has grown 10x or 100x etc, simply "The bigger they are, the harder they fall". A 50% drawdown on $10,000 account hurts but not as much as a 50% drawdown on a $1,000,000 account or a $5,000,000 account. Let alone if one maintains a large % of their net worth in the accounts they trade, you basically gamble with your life and career simultaneously in a field known for tail risk and black swans (it is a matter of time, inevitable).
SO, at the end of the day I am mostly focused on reviewing and reinforcing the preventable mistakes and renewing my conviction that managing loss is far more important than winning outcomes when the winning outcome comes at the risk of an out of proportion loss, in this case just taking one more attempt after position lockout.
In a situation that many people would struggle to adapt to the damage, I simply acknowledge the objective nature of the day and do not take it personally. I think that the emotions of any difficult day can definitely create lapses in judgement as well as hubris itself from any good run. In these cases I believe they just happen from time to time and my best case for managing them is just simply to establish more and more conviction in the desired outcomes which is simply to reduce loss. I really do think that systems themselves offer the safeguards that one can rely upon when the emotions flare up. It's just human nature to have emotions and not something the vast majority of people can simply omit.
I'm still greatly up on the month and ultimately just would like to encounter this situation in the future so I lose well and be proud of that outcome by the end of the session.
I think one's greatest advantage in long-term profitability and consistency is purely to limit mistakes and losses... If you take your outlier losing days and tally the cumulative PNL of mistakes I'm 1000% sure that it be an astronomical difference in your current running PNL.
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