Tuesday, December 19, 2006

Several Lessons From The Day's Trading

Going over the transcript from this morning's session, several valuable lessons jump out at me:

1) There's a difference between a good losing trade and a bad losing trade - A good losing trade provides you with information about the market. My initial short position was a good trade, riding the market's weakness in a short-term downtrend. When the trade reversed and took me out with a small loss, that was concrete evidence that buyers were attracted to value below 1430 in the ES. By waiting for the next round of selling in the TICK, I was able to ride this strength for a decent winner when the ES returned to the top of its preopening range. A bad losing trade results from a failure to take all the facts into account. The only information it provides is a heads-up to stay grounded in the market's volume flow before entering a trade. My last trade ignored solid buying in ES, even as the Russell was pulling back. That's not the kind of market weakness that should justify a short position. The large traders were not hitting bids in the most liquid of the indices. By jumping on a trade that had worked for the past two days before checking all the facts, I made a bad losing trade.

2) When You're Wrong, Get Out - When the market reversed against my initial position, I didn't get stubborn. Similarly, after that last trade (the bad losing one) hit my stop, I was out. Had I fought the market tides at those times, I could have been down significant money on the day. In both cases, I knew where I needed to get out and what would make me wrong. It's back to that lesson I mentioned earlier: It's OK to be wrong, but don't dig a hole for yourself that you can't get out of.

3) Stay Flexible - I went into the day session leaning to the short side, but approached the early morning as a range bound situation to keep myself alert to buying possibilities. When the initial trade reversed on me, I was able to reverse to the long side. Research and market information can give you an opinion about the market, but you always want your opinion to be a hypothesis, not a fixed conclusion. "Don't marry your opinions" is another piece of market wisdom that serves us well.

Perhaps the most important lesson of all, however, is to never stop learning and never stop working on your game. I've been trading since the late 1970s in some shape, manner, or form and I still make some boneheaded mistakes. I am just as happy to post the errors as the good trades. There's something to be learned in both.

Thanks to all who have kindly commented online and off re: the session.



yinTrader said...

Hi Brett

Thank you for sharing both your errors and your wisdom in your trading exercises.

I enjoy your weblog tremendously as you are open, passionate and sharing without taking offence when someone disagrees with your points of view, which is rare, in any case.

Most of all, you make time to share which is most instructive to novices like me.

Just a little expression of my appreciation for being so fortunate to have stumbled onto your weblog about a year ago.

Through our posts on your weblog, I feel I have become acquainted with you, and I hope you will visit my country in the not too distant future to share your research and wisdom with us.

The year is coming to an end and I wish you and your family all the best.

Brett Steenbarger, Ph.D. said...

Thanks greatly, Yin; I would be honored to come to Singapore and meet with traders. Let's see if we can make that happen in the new year. Have a great holiday season--


Flatwallet said...


Thanks for sharing that with us. It's a nice reminder to all of us. Also you just learned something even from a bad trade.


Brett Steenbarger, Ph.D. said...

Thanks LP,

Yes, it's 29 years almost to the day since I placed my first trade. And still it's a learning experience!


Ted said...

Hey, what happened to my post that disagreed with yours?

Brett Steenbarger, Ph.D. said...

Hi Ted,

I just went through my inbox and my read posts to make sure I didn't overlook your comment. I'm afraid I never received that post. If you can resend, I'll be happy to respond. Thanks--


Ted said...

Hmm... I had a long post that disagreed with your first two points.

In short, I disagree that your current financial status should affect valuing a trade as profitable or not.

Brett Steenbarger, Ph.D. said...

Hi Ted,

Sorry I didn't get your earlier post. I do agree that your financial status should not alter taking a trade that has good odds or avoiding a trade that lacks an edge.

My basic point is that, IF a trade has good odds and doesn't go your way, it may very well be providing you with valuable information about the market at that time. If the market is NOT living up to its usual tendencies, something special and unique might be going on.

Very often, I've taken a trade with good odds, had the market not go my way, then flipped my position to go with the order flow. Those can be very successful short-term trades. It's not so much my financial status that's affecting the decision making as the way that the market is behaving relative to its historic norms.

Thanks for the interest and comment--