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I have identified an issue which if resolved will make me a better trader.
I have rules ( very simple basically S/R test and retest, trendlines break etc) that I follow for entering a trade.
I do not have rules for exit. I am unable to come up with a good rule so I base exits on discretion which leads to random results.But that is not the problem I am requesting guidance on ( on this thread atleast).
If say I have long bias and see a setup. I take that setup and say the trade is going in my favour. There may be another setup which is forming up on the charts on the short side. If I was not in the long trade I would anticipate and take this short setup 7 times out of 10. However when I am in the trade, it is like I am blind to this setup. So it may be said that I have a blind spot when I am in a trade ( maybe trading on hope and adrenalin). Many of my real and paper gains have vanished in this spot
Do other traders also face similar issues? Any solutions.
Yes, I know what you are talking about. It is a cognitive bias, which is linked to the fact that you have an open position. Markets are strange animals that suffer from bipolar disorder. At each moment there is an equilibrium between buyers and sellers, meaning that short setups and long setups are always balanced. Having a long position on will lead you to ignore short setups, as you filter the information through your long biased lenses.
Anchoring and the Focusing Effect
The mechanism behind this behavior is anchoring or also called the focusing effect. These biases were first understood by Amos Tversky and Daniel Kahnemann, the fathers of prospect theory. Also see Wikipedia here:
Once you have your position on, your judgement capabilities will be subject to this cognitive bias. You may not notice short setups. The only way out of this problem is to establish rules, when you are in an unbiased state, and follow those rules during the trading process.
This means that when you enter a position you should have targets and/or exit rules in case that you trail your stops. A short setup should be one of your exit rules, unless the short setup occurs in a different (smaller or larger) timeframe. This is the way I exit my trades - at least if I follow my rules:
(a) the intial stop (which may not be larger than my money management stop)
(b) fixed targets below resistance or above support (various methods used to establish support and resistance)
(c) exit after a buying or selling climax
(d) exit after a short setup shows
(e) trailing stop adjusted to breakeven, when part of the position was exited
(f) trailing stop further adjusted from time to time with discretion to protect part of the profits
The most important virtue is to accept the initial loss in any case. The reason is the cognitive bias, we are talking about. Once you are stopped out, the cognitive bias goes away - unless you are a revenge trader and those do not last long. Without the coginitive bias you can the reevaluate the situation and understand what went wrong, or why your original setup did not work. As long as you are in the position, you will always find reasons why the position should move in your favor, and even worse you may decide to average down to make it easier to attain breakeven.
In my opinion the only way to deal with cognitive biases are rules which are always respected. When not trading, setup the rules. When trading apply the rules, but do not change them.
Your problem is not uncommon. But you have a HABIT that makes things worst. You have what I would call..."Tunnelvision-TICK-aholic." You're too focus on the tick move/price action that you see nothing else...not even if a naked Playboy Playmate is standing next to you.
Yes, you have to nip your bad habit in the bud...otherwise you will not move to the next level of your trading. I can suggest a practical solution but I'm not sure you would want to hear it.
"Faith is the substance of things hoped for, the evidence of things not seen." --- "Therefore, I Believe it and I will see it. And every day and in every way, I am healthier, wealthier, and wiser."
Hmm, practical and fruitful…well Fat tails provided you that and it’s a good practical solution to your situation.
The only reason I posted, was because I noticed that you have bad habits but will only allow you to accomplish step a and step b of Fat Tails’ solution. Your bad habits will not allow you to accomplish step c successfully, in my opinion.
From what I can read, in between the lines from your post, your trading plan is “incomplete.” If you recall from the death of Osama Bin Laden, the Seal Team executed their plan quite well. One of the reasons, a very important reason is, they had an EXIT PLAN. (aside from the relentless PRACTICE).
YOU DON’T!!! – NOT GOOD!!! – Especially if you go LIVE!!!
Example, if you’re baseball player and you can’t even hit a ball with consistency during practice, why would the manager put you in a LIVE GAME?
You also admitted to having “HOPE and ADRENALIN.” Adrenalin is a tricky thing, it could be a good thing or a bad thing if NOT controlled… I suspect you can’t control it…not yet anyways. And HOPE?!!! HOPE are for FOOLS in a trade. Hope is used when you are no longer in a trade and you are working on R&D…which I suspect you have lot of R&D to do. Example, “I finally have a COMPLETE trading plan…hmmm, I HOPE it works.” That is where Hope belongs. Because once you’re IN a trade, there are only two things that will happen…you WIN or you LOSE…there’s NO HOPE.
I told you, you have a case of “Tunnelvision-TICK-aholic,” but you also have it’s opposite twin, “Deer-in-the-Head-litis.” Let me tell you how they work together, I’ll use the same Playboy Playmate example to embellish my point.
You enter the trade long, you immediately feel the adrenalin rush, hope comes along for the ride hoping the trade will shoot to the moon and make you killing. But your “Tunnelvision-TICK-aholic” kicks in as well, your eye balls are hypnotized to the price action and nothing else, not even other charts or indicators get a glance.
Then your Playboy Playmate wife stands next to you, naked, jumping up and down in excitement knowing you’re in a PROFIT, big or small doesn’t matter…profit is profit. She’s hot and excited in a good way that she wants you to take the profit and have hot sex with her, but you don’t even notice her because you have “Tunnelvision-TICK-aholic” and NO PLAN how to exit.
Sure enough the “thinkable” happens, the market pauses and then begins to turn around against your position because you didn’t see the other signal from the other chart, “Tunnelvision-TICK-aholic.” But you have HOPE whispering in your ear saying, “Don’t worry.” And then the once profitable trade is now at break even.
And this is when the transition from “Tunnelvision-TICK-aholic” becomes “Deer-in-the-Head-lits.” Your once naked Playboy Playmate wife sees you are no longer profitable and now she puts her clothes back on and she is no longer in the mood.
The once profitable trade and once break even trade is now a losing trade and it’s really losing a lot fast, but you do nothing because NOW you have “Deer-in-the-Head-litis.” You are paralyzed with shock and with Hope whispering, “Don’t worry, it will always go back.” But you also hear a voice from your once naked Playboy Playmate wife saying, “GET OUT OF THE TRADE.” So you turn towards the voice and all you can stare at are your wife’s Bodacious Ta-Ta Headlights, because you have “Deer-in-the-Head-litis.
Like all wives, when they are no longer in the mood…they want you to take them seriously. So staring at their bodacious ta-ta Headlights when they’re not in the mood and not looking them in their eyes really, really pisses them off. So what does your once naked angry Playboy Playmate wife do to you? She picks up her bag and WHOPS it across your head with it…while the market moves down another tick against you…and says, “Get out of the market.”
But like all men with “Deer-in-the-Head-litis” just have that dumb look and just keep starring at their wives bodacious ta-ta Headlights. So what is a wife to do, but to continue to smack you upside your head while the market continues to move down against you…and now she’s yelling, “Get out of the market.” And I would say 99.99999 percent of the men would agree, they always hear the “ARE YOU LISTENING TO ME?” part.
So right about now you’re feeling this Bad adrenaline because you are being pummeled upside your head left then right and again…and with each blow the market moves against you until that thing that you were staring at because you have “Deer-in-the-Head-litis” SMACKS you soooo hard that the PAIN was too much to take that it brought you to your senses and forced you to exit the trade with a tremendous loss.
Now that the SLAUGHTER is over, you only briefly feel relief that the beating is over. Now reality sets in… The trade is over, the bad adrenaline is gone, hope is gone, your once naked hot for sex Playboy Playmate wife is gone, your once profit is gone…but since you kept repeating this pattern for weeks you realize your trading account is gone.
You feel numb for a moment and then…
If what I describe here fits your situation then I’ll continue with a possible practical solution in part II, if not, then I apologize for taking your time.
"Faith is the substance of things hoped for, the evidence of things not seen." --- "Therefore, I Believe it and I will see it. And every day and in every way, I am healthier, wealthier, and wiser."
Your post was like a bitter medicine.....please proceed to the solution.
I have given exit strategy a thought. I do not want to impose a rule ( more comfortable with a guideline).
The following is what makes sense to me at the moment. It can be argued that it is ambiguous ( but so is the market).
This will ofcourse evolve over time. However I am inclined to give this a try.
"
Your decision to exit a trade means you perceive changing circumstances.
Don't suddenly think you can pick a price, exit at the market.
IF THE TRADE ISN'T GOING THE WAY YOU THOUGHT, GET OUT AT THE MARKET!
"
I have my stops in place and have no issues taking my stops. I have not yet developed a firm sense of where I take my profits or if I need to be conservative or aggressive in protecting my stop. But will work on it.
I have been making an error ( ie. an obvious error) to take an entry based on 5 min chart ( or 10000V chart) but I have been exiting based on 1 min chart. I am being scared out of many trades. I will work to rectify that and take exits based on 5 min chart.
Picked the following from trading lessons in RTRADE's journal. I will try to use it.
"Faith is the substance of things hoped for, the evidence of things not seen." --- "Therefore, I Believe it and I will see it. And every day and in every way, I am healthier, wealthier, and wiser."
