Repetition is the mother of all blowups!

My close trading friends know I had some rough patches this past year trading.  I had some great times too, but it is the rough times that finally brought me to my knees so to say and made me take some time off to reflect, recharge, and re-evaluate my approach to trading.

I absolutely love trading, and I have backtested, forward tested and live traded enough over several years to know some very high probability trades.  I also know enough to understand that leverage is both good and bad and if abused can crush the best of traders.  Revenge trading, or scalping with an overleveraged lot size is usually not a good idea, trust me on this!  Trading without a plan, without sound money management (whether that means a certain percentage of capital traded, or segregating risky from moderate possitions in subaccounts), trading poor setups or virtually non existent setups, momentum trading a slow market because it is Friday afternoon and you are not at your weekly goal yet, or the worst of the worst….. trading without knowing your reason for the trade are all mistakes and poor choices that I know enough not to do.

 Yet, I found myself repeating some of these mistakes often this past year, to the eventual destruction of most of my trading capital.  Yes, it was a disastrous year from a purely return standpoint.  So why the heck am I putting this on my blog for anyone to see?  Too much espresso perhaps…. but really, this is a post to myself to be able to refer to throughout next year should I consider the same failed non-strategy strategy.  I already can be fairly certain of the outcome having “tested” this approach off and on over a year long period.

 Twice in the past year I put in a decent stake in one of my trading accounts.  I ended up having to refund both times at a much lower amount.  I remember one period where I was on fire, huge returns, and leveraging some big moves. I made some truly amazing returns.  I was hopefull I could get my account up to $X and then I would return to a more reasonable leverage amount and more thought out trades.  It seemed it was going to work.

I rember clearly the start of my blowup.  I was literally less than $200 from my goal on a Friday afternoon.  This has always been a problem for me – setting a weekly goal and  getting close on Friday and then damaging my account trying to stretch for the goal.   I had spent some time backtesting scalping on the 3 minute charts on the EUR/USD and decided to “just scalp a few quick trades” with some rediculously high leverage to nail my goal.  Trying to scalp on most Friday afternoons is like watching paint dry and I knew it was a bad idea, but hey, I was so close and only needed 1 out of 3 trades to work to be successful in my backtesting (at normal leverage).  What could possibly go wrong?  By the end of that Friday, I lost around 30% of my account.  It was not the trading style, it was the overleveraged lot sizes that killed me.   I kept getting scared out due to large real money drawdowns.  Over the next two weeks I kept trying to get my money back, almost did a few times, then lost again due to the same error in judgement.  Anytime a 7-10 pip drawdown is getting scary rest assured you are trading very wrong!

So after a big blowup I would  trade with the ashes of my account, turn say $100 into $1000 over a period of weeks etc. and get back to good trading techniques.  Refund a bit and the pattern would repeat.  My wife noticed this pattern over time and said you trade much better with not much money and you trade badly and lose with a large amount of money.  Maybe you should take your profits out after you reach $X and then start over again.  I told her she did not understand and I needed a larger trading account so I could make more trades and money! It has actually become a joke with us about blowing up the trading account, although it is not all that funny, there is some humor in it and in the predictability of human nature.

 So, here I am at years end contemplating next year and the state of my trading education.  I have come to understand and fully embrace what one of my mentors has said for years that money management will make or break a trader.  A great trader can be crushed with a few bad trades due to bad money management and abuse of leverage.  An average trader can learn to trade for a living with just a few good trade setups and good money management.  It is my goal to emphasize good money management this year and only trade the trades I have tested and understand. 

I will continue to backtest and work on trading strategies to learn high probability trade setups, but I will also be spending alot of time learning more about emotions in trading.  I tend to focus on the logic but it is the emotional side of trading that is I believe holds the key to success to becoming a more consistent and profitable trader.  Here’s to another year, wishing you much success!


Leave a Reply