Although all of us claim that we like constructive criticism, in reality we rarely like to hear the truth. After all who wants to be told that you are fat, or lazy or sloppy or disorganized or selfish or arrogant? Few people have the courage to tell us the truth to our face. Our natural instinct when confronted with criticism is to deny, defer and delay any responsibility for our actions. When good friends or parents proffer some harsh advice the typical result is a screaming match followed by a stormy exit.
After many such arguments over the years I realized that screaming, shouting and denying doesn’t work in real life or in the markets. Ultimately to move forward you need to suck it up, accept the criticisms and correct your behavior. This is especially true when it comes to trading. You can either listen to what the market is telling you or you can lose all you money.
After trading extraordinarily well for most of March I went off the rails last week giving back nearly half my profits over a twp day period. In the past my natural reaction would have been to punch the screen, throw a few office supplies around and then storm out, cursing the market, the unpredictability of trading, and the idiocy of life in general. Instead I decided to grow up, accept the fact that I screwed up and find out why. In looking at my trade runs I realized that a new experimental money management strategy was actually creating massive instability in my intra-day trading. Typically, I am a single entry, single exit trader. However, a method whereby I tried to scale up into a position, blew up in my face. Without even realizing it I reverted back to my old habits of scaling down into a position. In other words by introducing some flexibility into my money management rules I rapidly lost all discipline and paid the price.
There are some traders who can successfully experiment with both position scaling and the size of their stops. Unfortunately, I am not one of them. I know my limitations. My orderly, OCD-like personality does not function well in chaos. Like an alcoholic after a sip of liquor to his lips, I immediately spiral down into wild, average-down-until-you-get-stopped-out-for-a-massive-loss trading orgy if I do not adhere to my single entry, single exit rules. So I quickly changed my approach and never made more than one entry per trade. My drawdowns quickly diminished.
However, looking at my trade runs in more detail, I realized that my other problem was that I was still making many trades that were off plan. Whether it was boredom or experimentation -- the reasons did not matter. My off plan trades were a big cost factor to my P & L. Nevertheless, I knew that any attempt to curtail them would be futile. I am just too impulsive by nature to ever contain myself strictly to my setups. Instead I decided that I would try to control the damage without forcing a personality makeover. I simply resolved that all my impulse trades would be 1/10th my regular size. That way any damage to account equity would be minimal. However, I went one step further. I set the default execution size on my trading platform to 1/10th my regular size. That way when I wanted to trade my actual setup, I would have to make a conscious effort to change the sizing before I could put on a trade. This final fail-safe method made all a huge difference in my trading. The only “serious” trades that I was taking were the ones that set up to my plan.
It’s never fun to confront your flaws, but to ignore them is much worse. My friend Rob Booker once asked me if trading was the toughest profession there is. I answered yes. And tough professions require tough love.