Fear and Greed

So… four days since the launch of my trading system (perhaps I could come up with a really cool name for it, like Operation Make-Me-Obscenely-Rich or something), I’ve bought and sold positions in all 5 markets, gotten my feet wet, made a few accounting blunders, but am otherwise still alive and kicking.

While I’ve done a number of trades so far, some good and some bad, I’d like to blog about a particular trade that I did today where I succumbed to the two emotions that every trading book has been warning me about: (yes, as you may have already guessed from the title), fear and greed.

I was long a mini crude oil contract at $70.625. Yesterday, the market went in my favor up to around $72. (A one point move is equal to $500 USD in profits or losses) My stop-loss was set at $71.34, which would have left me with a nice profit of $357 even if I’d been stopped out. I hadn’t set any stop-losses so far, preferring the flexibility of a mental stop. If the market gapped below my stop-loss, I could always get out. But if I had entered a stop, market noise could have triggered it, forgoing my chance for future profits. Or so I thought.

I woke up this morning and checked the markets. While oil had gone below my stop the night before, it was trading back up at around $71.6. The fact that the market had gone below my stop the night before should have warned me to either a) get out or b) put in my original stop (since if it was hit, then I would have been just as well off as if the stop had triggered the night before). Instead, greed and overconfidence convinced me that oil was only going to go up and I should “let my profits run” by not setting a stop that was so close to where the market was trading. The market traded to $71.3 a couple of minutes later – now I was officially beyond my stop out point – but still I left the trade as it was, convinced that it was just market noise.

I went to the gym, but on my way back I decided that I shouldn’t deviate from the system too much: a stop is a stop. I decided that if the market was above 71.34, I would place the stop, and if it was below, I would get out. I checked the markets and I realized to my horror that oil was trading at 70.6, and then it went down to 70.55: my huge profit had turned into a small loss!

Fear hit me as I watched the figures jump up and down – there must have been a news release of some sort – as I tried to figure out when I should get out. I’d made a (perfectly legit) loss in oil a couple of days ago and I was hoping that this trade would make up for it. Now, it had turned into a question of whether it would ADD to my losses or not. When the market hit 70.66, I jumped and sold my position – leaving me with a miniscule profit of $17, but -$7 after commissions. I had pretty much broke even.

Of course, (and I’m sure many traders can attest to this experience), once I’d gotten out of my position, the market immediately began to move my way. It’s now trading at $71. I realize now that if I had set my stop in the first place, I would have been out of the market with a happy profit of $350 instead of having a stressful morning with a $7 loss.

A couple of lessons I learnt:

1) A system is a system – if a market trades below my stop out point, even if it’s just one tic below, I get out. No questions asked. This would both minimize my losses and protect my profits. While “let your profits run” is great advice for the trader, I should never use it as an excuse for greed.

2) Don’t panic in the face of fear – I should have waited for the market to stabilize before putting my trade in. Jumping in when markets are volatile is a surefire way of getting the worst price. I was right to decide to get out, but wrong in my choice of deciding when to do it.

Thankfully, this wasn’t an expensive lesson – I pretty much broke even – but it’s one where I’ll remember for a long time. I figured that I should blog about it so I can recognize the situation when I’m faced with it again.

Update: Good thing I got out when I did. Oil is now trading below $70.

Another update: An immediate benefit from this lesson learnt on stops. I placed a stop at 1000.5 while the S&P was trading at 1012. It was hit within an hour of the market opening, letting me exit with a profit of $300. Wheee-ew.

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