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.