The needle in the haystack

In A pair of Aces we saw Robert protect his capital when the odds are stacked against him, and "make hay" when he knows he has a trading advantage. We now explore why we sometimes consistently lose money.

Robert's First Trades of the Day

Taking Robert's first trades of the day as an example, we'll see what his trading metrics reveal:

How Robert's metrics change on the first trade of the day

How Robert's metrics change on the first trade of the day

In this case, every metric is reduced on his First Trade of the Day.

Win Rate

This trader typically hits a lot of winners (65%), with his winners being smaller than his losers (each winner is 0.61 times each loser on average).

His Win Rate drops from a very healthy 65% to 45% for his first trades of the day.

Risk: Reward

Secondly, his Risk: Reward ratio - which is already quite low at 0.61 - drops to 0.27. This makes his winners only about one quarter the size of losing trades.

Disposition

And thirdly, his Disposition ratio is showing that while he is still spending more time in his winners than losers (1.1 times), it is lower than his usual behaviour of spending 1.7 times as long in winners.

So what's happening?

There are 2 reasons why performance can degrade:

  1. Market conditions - it may be that if all first trades are entered during (for example) the US market open, the higher volatility doesn't suit this trader.
  2. Robert's emotional state - these trades represent Robert's re-entry into trading after a break, which may have an impact.

Robert examined his trades in detail, he realised that it was his personal emotional state. When Robert gets to his trading station, he can't wait to get back into the markets. This was causing him to be less disciplined about his trade setups.  On his Sunday trading, he was even more keen than normal, so as well as being undisciplined, he also INCREASED size on Sundays, to attempt to get a head-start on his trading week.

These combined problems were Robert's understanding of the problem.

What did he do?

Robert gave himself a new rule. He has to wait at least 15 minutes before he puts on his first trade of the day. While this causes him to miss some good signals, overall it is curbing his over-enthusiasm to trade irrationally and his metrics have started to improve.

He has committed to use very small size until he sees a marked improvement in his metrics.