It's a very rare day that I don't wish I had done some things better in my trading. I wish I had a little more of this, or a little less of that; I wish I hadn't set a stop quite so tight; I wish I had anticipated a broad direction better. But on the whole, I generally can give myself a "B" – sometimes a B-, sometimes a B+, but usually I'm pretty happy with how I handled myself.
Today isn't one of those days. I think a D+ is about the kindest grade I could offer. What happened? Did I lose money? Yes, about half a percent. Nothing horrible, certainly, but a loss nonetheless. But that isn't the reason I'm upset – – I've had plenty of occasions where I've lost more than that and didn't feel the way I feel right now.
The reason for my present self-loathing is that I acted in haste out of fear, and that rarely is wise in trading. Simply stated:
+ I was about 63% committed in my portfolio, entirely to short positions;
+ I was quite concerned that we would have a very strong up-move today, which would merely be the kick-off to a substantial countertrend rally that may have lasted weeks;
+ Since I'm profitable for this month as well as last, and profitable for the quarter in general, I am jealously guarding those profits and don't want them threatened.
Given the above mindset, I wanted to get out of my shorts and get into either cash or some long positions. The market opened a little strong, and it got a little stronger, and I fell all over myself closing out all my positions. I breathed a sigh of relief. And then the market started weakening.
If you read my Measuring post – which is quite important – you'll recall that I keep a spreadsheet available which shows what my P/L would be if I had done nothing on a given day. In this instance, now that I was entirely in cash, I watched the day's loss get smaller……..and smaller……..and smaller…..
And then I watched it turn into a profit and get bigger…….and bigger……..and bigger.
You can imagine how I felt. Here I am, the bear of bears, and I had covered what turned out to be brilliantly-crafted positions that were doing precisely what they were supposed to do. I had, out of an abundance of fear and caution, covered at pretty much the high prices of the day and watched my former positions flourish.
It was really tortuous.
I did wind up re-entering a portion of these shorts (at worse prices, naturally), but the psychology behind these positions is wholly different now. The risk profile is different, and my attitude toward them is different. None of this is good.
Well, what if the market did blast off higher, and my covering positions preserved profits that I would have otherwise lost? Well, yeah, what if? While we're playing games, what if the Dow flash-crashed a thousand points today? Anything is possible. It's pointless to play these endless what-if games. The fact is that I need to work within the confines of a logical, rules-based framework, and my desire to protect profits, ironically, made me lose money.
So what to do now? I think having a poisoned mindset when trading is awful, and I am clearing my mind of these thoughts of regret and anger. Tomorrow is a new day, and I can simply re-commit myself to a more steadfast rules-based discipline and remember the pain of today. Pain can be instructive, and I must take value out of today to inform my decisions in the years to come.
I likewise hope that, as I hopefully learn from my own experience, you likewise can take something away from it. Everyone has their own style. My style is very focused on large quantities of individual equities. Those equities have to stand or fall on their own merits, and keeping their stops up to date is the only task I need to manage well. Making sweeping conjectures about market direction can be a fool's game, and in my style of trading, I can't let macro speculations ruin individual decisions.