Embracing Failure

"I've missed more than 9,000 shots in my career.  I've lost almost 300 games.  Twenty-six times I've been trusted to take the game winning shot, and missed.  I've failed over, and over, and over again in my life; that is why I succeed."

-Michael Jordan

Michael Jordan is the best basketball player ever (go ahead and try to argue that if you disagree).  When you look past his 6 championship trophies with the Bulls along with countless MVP awards, scoring championships, and other accolades, you see that he was cut from his varsity team in high school and how he came up short of a title in each of his first 7 professional seasons.  Michael Jordan became the best because he faced a lot of failure throughout his career.  If you look through the history books, you'll see that just about any highly successful person has failed on their way to the top.

As traders, we face failure more often than most people.  If you trade intraday, I'm willing to bet within the past week or two you've had at least one day where your timing was just a little bit off or your setups just didn’t work out like they normally do.  While it’s easy to get frustrated and down on ourselves, we should really be thankful for the days of failure the market gives to us.  

If we are going to be consistently profitable traders, we need to learn to cope with failure as well as make the most of our failures.  Humans are naturally inclined to be more sensitive to failure than success.  In order to cope with failure, we first need to accept that EVERYONE faces tough times; we’re not alone in out struggles.  The faster we realize that some degree of failure is unavoidable, the better we will be able to accept it when that time comes. Another way to cope with failure is to keep a level head when you’re losing as well as when you’re winning.  Don’t get to high on yourself when your winning, and don’t get too down when you lose.  Just move onto the next trade and focus on performing the best you can.  Many of us will make hundreds or thousands of trades in the long run, so a handful of losses may seem unbearable in the short term but means virtually nothing in the long run.  When you’re struggling, reach out to other traders and just talk to them.  Chances are they’ve been in the same position before (or worse).  They made it through, and so can you.  Every trader loses sometimes, but our main goal must be to live to trade another day.  If we lose all the money in our accounts, then we physically can’t trade.  Cutting position size, following strict stop out rules, and not trading frustrated or forcefully are great ways to minimize your losses and ride out the tough periods.  If you can’t be in the right state of mind when you’re trading, it’s best to just step away and not trade until you get your head straight.

There are plenty of ways to capitalize on your failures and make yourself better in the process.  Filming your screen and reviewing certain situations that you struggle with is one great way to do this.  Things seem to move slower the second or third time around, so you can really focus on where you made your mistakes and why they happened (This has become my favorite method of reviewing my trades; its great!).  The next time a similar situation arises, you’ll be able to remember back to your past experience to avoid the same mistake this time around.  Document all your trades on paper, too.  Be detailed, and be brutally honestly with yourself.  If you did something stupid, writing it down helps you take full accountability for it.  Another great way to improve on your failures is visualization.  Put yourself back into the situation that caused the failure.  Remember the thought process you were using when you made your decisions and correct yourself where you were wrong.

Bottom line, failure is unavoidable.  I’ve been reading the Market Wizards books this summer, and nearly every single one of the world’s best traders have had periods of failure.  They didn’t allow these times to ruin them; instead they turned them around and used them as learning experiences.  If we do the same, we will only be setting ourselves up for future success.  Have a great rest of the weekend, Happy Father’s Day, and best of luck in the upcoming week!  

EURUSD 6-8-11

I haven't been trading too much lately, been working on an algo and studying for tests.  Tonight I briefly placed a couple trades in the EUR/USD.  I typically play ranges during the evenings, so I initially identified 1.4600 and 1.4567 as range levels.  1.4600 was tested twice but 1.4590 wouldn't drop support.

Pair soon after broke 1.4600 convincingly then found support at the level.  I like this play during the day, and I've found it usually also works in Tokyo, so I got long @1.4603 with stop at 1.4596.  Covered half above session high at 1.4609, moved stop to break even and let the rest ride moving my stop as pair moved up.  The move started looking steep and it couldn't hold above 1.4625, so I got flat.

Unfortunately I accidentally made this trade on a demo account.  Took a quick, stupid frustration long above the 1.4625 level and was quickly stopped out for a small loss.  Other than that, I was pleased with this evening.  I have trouble letting my winners run, but I was pretty patient on this play.  I'll be looking for this move more often during this session.  Its easier than range trading and its fairly low risk.

Trading an Economic Report

           Since plenty of traders including myself look for spots of increased volatility to make a quick move, I figured I’d put together a post about to set yourself up for a successful trade after an economic event or report.  On the eve of the May NFP’s, it seems appropriate.

           In my opinion one of the most important things to gauge before an event is the expectation of the markets.  Just about anywhere you find an event calendar, you can find a value economists have determined to be the ‘expected’ result of an event.  Tomorrows NFP number has had a general expectation of +170k, but many have already agreed that there’s a good chance the report will come in much lower than that.  Many estimates have already been updated to reflect a lower expectation since this week’s poor ADP numbers (probably closer to +125k or less), and the market has been processing these expectations.  Now let’s say that the actual number comes in around +100k.  While this is much less than the originally anticipate +170k, you might not see the reaction you’d expect when a number as important as the NFP’s comes in that much lower than expectations.  This is because the market has already accounted for much of the difference.  By understanding the true market expectations, you can prevent yourself from getting on the wrong side of a freight train.

           Another thing that’s almost guaranteed to rip you up is trying to anticipate the market’s reaction and get in before the event.  This is basically gambling in my opinion, unless you have some sort of strategy for doing it.  Even if a report comes out exactly how you expect it to, the market doesn’t always act accordingly.  It’s much safer to let the initial kneejerk pass before trading.  Even if you miss the initial move, there usually are plenty of opportunities to safely enter and profit.

           Understanding the event is another key to success.  Different events often have different types of reactions for different pairs.   Some events cause pairs to take off within seconds of the release and never look back, while others take 10-15 minutes to really pick a direction.  For example, the most important part of the RBA minutes is the last sentence, so you might not see a real reaction until the report is fully read.  Also know what pairs will be in play after a report.  You probably won’t see as much volatility trading a yen cross when the BoE announces new rates. 

           Identify your key levels before hand, prepare for all possible scenarios, and understand overall market sentiment.  Be patient and get good entries, but don’t be hesitant or you will get left behind.  There is plenty of quick money to be made trading off events, so you have to know how to take advantage of them.

          Below is a 5 minute chart showing how the EUR/USD reacted to the April NFP's that came out last month.  HUGE move.  I'm pretty excited to see what happens tomorrow morning.  Good luck to everyone trading it!

EUR/USD, 5 min, 5-6-2011 

EURUSD 6-1-11

Tonight I saw a good opportunity on the short side in the EUR/USD.  It fit my strategy well and gave me about a 4-to-1 reward to risk ratio.  I saw a significant past resistance level at around 1.4345-1.4350, so I started offering at 1.4345.  The snail pace of Tokyo gets me antsy sometimes, and I didn't want to miss a fill.  I started inching down my offer until 1.4343.  That order filled but kept pushing up to the whole number 1.4350.  Got stopped out but started shorting immediately.  Got refilled at 1.4152 and targeted the middle of the range near 1.4330.  Unfortunately I accidentally sold on market because a platform mistake at 1.4339 before it knifed a little further to 1.4325.  I foolishly tried to get small and hop back in the move, but it was too late and I was stopped out a small amount from the last trade.  All in all I maybe about 2 pips on a move that should've gotten me much more.

Had I waited for a good first entry and avoided trading on frustration on the last trade, this would have been a profitable trade even with the order entry error.  Need to work on these things for next time.  Currently the pair may be about to breakup for a nice little move after pushing through the 1.4350 and holding the retest.  That's all for me tonight, happy trading.