Charted Territory: Dealing With Good Trades Gone Bad

The magic word is "perspective."
Author:
Publish date:

Monday, May 3, 9:55 a.m.

Turning out to be great %$%@#$ day. Two new shorts,

(MCRS)

and

(RLR)

and they're killing me! Here, look at these charts.

See, not such bad picks. Sure, one could quibble with that bullish candle on RLR, but I don't trade based on candlesticks and I'm not going to start now. Yeah, and maybe the length of the broken trendline on RLR is also a bit short.

But, the fact is, the thing was broken. The volume was there, and in my gut it was a good short. And on MCRS, that was a lock! Shoot, it was almost the perfect short. But, same thing as RLR this morning: The stock has gone almost straight up since it opened. I really hate shorting.

11:36 a.m.

Oh, here's good news: RLR just hit my stop. So, let's see I was in the stock for roughly two hours and got nailed with a nice-size loss. Super. Feeling good right now. Fantastic #$$#@% way to start the week.

12:07 a.m.

I just checked: My shorts stink lately! From early April until now, I'm batting just under 50%. Just under 50%? That stinks. No, strike that. Under 50%, mega-stinks! I'm going to give

Dave Kansas

a call and tell him I don't deserve to write this column. In fact, I'm not even sure I should be trading.

Now, is that what really goes on in sunny Bethesda, Md., on days like today? Unfortunately, part of it is true. The part with the cursing and cussing -- that definitely goes on. Remember, I'm the same guy who kicked the bleachers when Diana got touched out two days in a row in the

Age Group Championships

.

But, do I internalize it? Do I say, "I stink as a trader?" Do I beat myself up and vow to quit?

Honestly, I used to. I used to take days and trades like this very hard. I'd get headaches, stomach aches, and put my mental and physical stability through the wringer.

But, I don't do that anymore. Well, at least not much, anyway. No, there's one little word I try to focus on on days like today. One little word that has slowly worked its way into my lexicon and now has elite status.

The magic word? Perspective.

Huh? Perspective? What's that got to do with trading? Well, everything my friend. Everything.

First off, think of your trades with the perspective of your overall trading career. In my case, I make about 200 or so short trades a year, so over the next 10 years I'll make nearly 2,000 trades on that side. Furthermore, let's say I really blew today's trades, and made some bad calls. You know what? Big deal. So I blew two trades out of the next 2,000. Shoot, even if I blew 20 trades out of the next 2,000, that's still only 1% of my overall total.

Sure, I aim for 0% screw ups, but that's not going to happen. Furthermore, whether I screwed up or not, I'm still only going to have about a 66% to 70% win rate on the short side. So, like it or not, I'm going to get a few losers thrown in no matter how great I pick 'em.

Okay, that's what I call "data perspective." It's helpful in keeping me sane, but it still doesn't make my under-50% win rate on the short side any more palatable. No, that's terrible trading no matter what. And with a money management scheme that emphasizes a high win rate, it's particularly nauseating.

It's times like this, then, that I fall back on perspective # 2: overall market perspective. That is, how is my strategy doing in light of what the overall market is doing? Think of it as the corollary to "Everyone's a genius in a bull market." Maybe mine in this case is "Everyone shorting in a bull market is a dunce!"

To make my point clearer, I generally look at the market through the lens of the advance/decline line, because that's the one "index" that my trading tracks most closely.

As an example, from April to October last year, I crushed it on the short side. Yet, most people would say the market started tumbling in July, not April. But look at the following chart.

You can see how the overall market started sliding a lot earlier than when the major indices showed weakness. April really marked the top, and not coincidentally, the start of my strong short run.

Therefore, if I'm right about my trading being in sync with the A/D line, and my trades on the short side stink right now, then the A/D line should have been climbing steadily the past few weeks, right?

And indeed it has, as you can see in the chart below.

In fact, in light of this up elevator, I'm thankful to have closed any shorts at all!

Now, as a sidebar, you could make the argument that I shouldn't be shorting at all when the A/D line is going up. And I'd agree with you, but only after the fact. It's easy to look back at this line and say, "It's obvious the market was going up, so I should have only been taking long trades."

However, I have tried many different variations of adding the A/D line into my trading as an indicator. All have failed so far. The A/D line just whipsaws too much, or it's too hard for me to figure out the trend early on. No, it's better for me to let the number of trades I have on any one side dictate on which side of the market I should be focusing. And thankfully, although my win rate is below 50% on the short side in April, I've only had a handful of trades there, and nearly twice as many on the long side.

Finally, to further emphasize my point, you'd think if my shorts stunk, my longs should be a lot better. And thankfully they are, with my win rate there being about 68%. That, along with the number of longs I have, and I've been doing okay.

Given all of the above, then, I can remove the bucket from under my feet and get back to business. No cause for alarm; no need to come unglued. Perspective, baby. Just keep it in perspective.