Just Because It's Simple, Doesn't Mean It's Easy

"The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading."

-Victor Sperandeo

2020 has been one of the most incredible, volatile and interesting trading seasons I've experienced. Having sold my portfolio weeks before the bloodbath, I was very happy at that time to dodge the 40+% downward spiral in stocks.

Unfortunately, when the rebound began, my trigger finger misfired and the opportunity cost was severe.

Every Tom, Dick and Harry were of the opinion that a v-shaped recovery was "impossible". I should have known better and followed the setups more closely but bought into the fear and paid the price.

It Was Unavoidable

Even though I abstained from traditional and social media, it was near impossible to avoid the "WE'RE ALL GONNA DIE!!" rhetoric that was festering all over the globe. This fear parayezed me as well and I bought and sold far too many stocks on the same day to avoid losing instead of leaving emotions at the door. All because I tried to avoid losing instead of following my plan.

What's worse - the setups conformed to my plan, I even bought many of them, but my conviction to the rules was weak at best. Missing out on over $255k in upside (without hindsight bias) forced me into action, this was a weed in my trading that had to be pulled out and destroyed forever.

It's all About Learning

When you miss monster runs there are a number of feelings, emotions and regrets that overload the senses. The "if I only" or "I should have" self-talk becomes pervasive to the point of mini-traumas we put ourselves through. It can set a dangerous precedent going froward, some people then:

1. Buy the stock/asset too high outside of an entry window, FOMO in.
2. Are too disappointed with missing the first train to take the second - there are always entry opportunities, so they miss it yet again
3. Don't take any trades at all that week or month because they feel emotionally stretched
4. Buy  lower quality or random stocks to compensate for the loss
5. Pile on too much position size to get revenge on the missed opportunities

So the initial feeling of helplessness perpetuates poor behaviour. Defeating all of these impulse reactions enabled me to get back into some of these positions safely and still make money this year. It was very hard to get to this point though. It also taught me something more valuable than any "Guru" course or other method could ever have - don't make assumptions and follow the plan!

I am referring to the real plan, not the one we create in our heads, the ones we write down, execute and repeat day in and day out.

Assumptions - Fear Based Thinking

As I stood on the sidelines in disbelief trying to figure out why stonks were rallying, I realized something pretty ground-breaking ... It doesn't fucking matter why? It matters that they are or aren't!  Price action > Opinion.

As humans we try to extrapolate scenarios, instances and want to outsmart the stock market to make more money. It's easy to forget that the stock market itself is a discounting mechanism of future price. So our attempts to be smarter than AI systems, trillion dollar institutions and other participants moves us from from statistically sounds plans into presumptuous "this time it's different" ideation.

So we buy a stock, set our stop loss and then do almost everything in our power to go against our trading system. The following ensues:

• Moving up stop losses too soon because "Corona"
• Reacting violently to any sell off "This is the big one"
• Taking profits too soon out of fear of loss due to prior traumas - from not trading our plan in the first place!

In general, this mental chatter where we go back and forth is high maintenance fear based trading. It is the opposite of the calm, system based and professional approach needed to make significant returns and turn this into a business.

The good news is, just like taking out the weeds (not the smokeable type), our garden gradually develops and we have the higher quality decisions left to nurture and develop. This really is trading incarnate and what the experience is all about.

Quick Note on Your System

Just a quick note on your trading system and or the people you follow; Even if you have the best trading system in the world and it has statistical validity. It doesn't mean that you can trade it. If these knee-jerk reactions and poor discipline patterns aren't resolved, no system at all will be able to make you money. This is why the ultimate trading weapon is.... you!

Defining and creating a plan that links and syncs with who you are is more important than any system. When you get to breakeven and start the weed removal process, the dollars roll in more frequently and the feeling of doom is replaced by a feeling of "I'm finally getting this".

So What Trades Did I Miss or Fumble

Allow me to indulge you in some lost opportunity porn, this year was particularly brutal:

Zoom Video Communications (ZM):

ZM was a particularly painful trade. I went in over-sized (so put on a whopper of a position) within my risk parameters. The following day I stepped back in amazement as the stock gapped up and took off. My sell points are above, not the worst sell points but certainly not to my rules.

Even though it was a 45% winner simply by removing my assumptions and emotions from the trade and sticking to the plan, this could have been a 324% win. So $4.5k of winnings vs a potential $32,400 gain.

I love this information because I know what not to do next time. Adopting a growth mindset, still making some money and preparing for my next trade! By trying to avoid losing my gains, I lost out on them - trading is paradoxical in this sense.

FIVERR Fiverr International Ltd (FVRR):

If you thought the previous one stung, let me introduce you to my ultimate missed bus. Fiverr. This one I am super salty about. I was sure this stock would hit the sky and loved how it made sense as a CV 19 play. It setup the most perfect buy point and in my head was "too good to be true". I took the below trade, the stock went up 18% the next day and for some reason, I dumped it all. Sure 18% beats the -.05% we get with banks but the real issue here - I did not follow my plan!

Having been elated about a quick 18% in one day, I sat back in wonder as to why I sold, it didn't give any sell signal and I was acting like an elated teenager. As my key rule is to not sell until it closes below the 50 MA two days in a row, the ensuing move was rather painful - technically i should still be in this trade.

As you can see - this one hurts a lot. I had a $12k position in this stock, made around $2,000 and walked away. This would have run up $60,000 had I stayed in my position and my account would be up in the mid triple digits. No Audi R8 this year.

Again, same theme. Making assumptions, watching news and being scared to commit to my plan. Probably the worst part of all these trades is that they were part of my system, the system was not a problem here, it was how I manged my emotions and let fear drive my decision making.

There Were More

I won't labor the point as even writing this down takes me into a loser mindset. The message should be clear though. Every time we try and avoid losing by doing things outside of our trading system, trying to be smarter than the stock market or acting on fear - the probabilities and statistics are no longer in our favor.

Opportunities to Understand Your System

I's absolutely imperative at this point to identify why loss aversion leads to losses in trading and relate it back to your trading system.

Any time we manipulate, change or make an assumption, it's game over and our emotional saboteurs are in the driver seat. Just like any terrible situation in life, the very thing we try and avoid becomes what we focus or what arrives.  Our brain is using it's primitive survival instincts to override objectivity. The spiral then begins as the things we hate start showing up time and time again, the pull into this frame of mind is toxic and luckily, not necessary.

Consider These Changes to Stay on Track

I have found during my reflections that typically, if I moved or changed my strategy it was due to the same issues, almost every time.  The primary one was my fear of loss. this helped me realise that one of the most notable things I was doing was trading too large and welding my character to my bank account. Associating your personal worth with your P&L is an unhealthy way to look at the market.

Every time I thought I would lose something, the voices in my head would sound like this:

1. "You are a fraud, you are going to lose this money and then what!"
2. "Wow, that was $500 you could have used for something else"
3. "What will your family think if you lose that money"

And so on and so forth.

This crystallized a few things that I used to trade going forward which have reduced my trauma from the stock market and also helped me remain objective:

1. Position Size

Typically, if people are chopping and changing ideas they have too much money at stake in the market. I began halving my position size on this premise and within days noticed I was more relaxed and stopped messing with my plan!

Overall, I never want to lose more than $500 on any given trade, this means with my 1% rule that a $50k account is the sweet spot for me to get aggressive, as the account builds up gains, my 1% rule then applies to the new account size. So when I am up to say $75k, my new 1% risk is $750.

This has kept me out of trouble on so many occasions and something everyone should do or consider. The amount of traders who do not protect themselves with risk management is mind blowing. Trading is risk management! Trading too large is like having a Lambo engine in a go-cart. It works great until you hit a fucking wall.

2. Too Many Positions

If you have too many positions on, the same issue can occur. Should I do this, should I buy that. All of these self-destructive voices about missing out, not being in the big winners and chopping and changing between stocks. Basically looking at other people and picking up tips and being a "Twidiot" - blindly following idiots on Twitter.

My rule is simple on this one, if I have more than 6% of my account at risk at any one point if my stops were hit, I can't take on more positions. This keeps me in fewer names but more concentrated on meticulous research into price action of the ones I buy.

3. Reflection and Journals

If you aren't sick of me mentioning journals then this may be my first blog you've read. Journals are the absolute pinnacle of professional reflection and trading. Show me a professional trader, sportsman or plumber that does not run his or her business with some kind of metrics, measurement and feedback loop.

My journal has pointed out some of the largest blind spots in my approach to trading and is something everyone should and can do. Combine this with marked up charts, entry points and rationale and over time the correct behaviors and flaws begin exposing themselves en mass.

This entire blog and why I sell too soon was sparked from one of these personal reviews.

4. Writing Down my Plan and Marking Charts

This is the simplest one of them all. Before taking a trade I write down an if then and plan around the trade. An example below:

• Buy GOOG at 1818
• Set stop loss at 1760
• Has good price action and reducing volume since prior breakout
• High relative strength vs overall market
• Close to ATH
• Not too extended from 20 Day MA

My entry is defined and I have a small story around buying the stock. Very simple but I've caught myself with some dumbshit entries which would have almost ruined me if I bought on impulse. As someone who suffers from impulse decisions.

Summary

Loss aversion and trading are intermingled very nicely due to the nature of money and it's huge impact on emotions. As a trader it is super important to acknowledge the emotions, drivers and reasons we do what we do.

Part of the problem is people expect various things from trading but have no real plan or aren't executing the plan they do have. the reality and nature of the market dictates that without this plan or having a clear and repeatable strategy - you are essentially gambling.

If you've struggled with loss aversion and are constructing your own demise financially it's time to put some steps in place to protect your psyche first and in parallel your trading account. If you don't, you will go through a series of waves between emotion and despair.

I made the decision to stop being up, down, left and right about trading. Rooting out the fear and assumptions that create loss instead of avoid it has been a life changing process that just keeps getting better!