August 5 2009 Post Market Review

The morning read on the market was a little tough for me this morning but I knew what to do when the price tested my support zone from the prep.

The premise and execution was good but the trade management needed a little work.

It was an interesting experiment today. I was doing some commentary for some our our clients in an online presentation room today when I took the trade live. I pretty much bought the low of the day.

I decided to show everybody how I would manage the trade by displaying my chart and order DOM. Some participants in the room were asking when would I go break even. The trade had accomplished a 4 point excursion after taking a bit of heat.

I repeatedly said that since this was a key zone on my prep, that it was a "binary" trade for me. "Binary" means a "yes" or "no" outcome (winner or stop out).

I have consistently said throughout my blog that I do not like break even trades. They cost me more than they save.

What did I end up doing just before lunch? I moved my stop up a bit and got clipped out at the low tick...sure everything "looked" like it was falling apart but I broke my rules because I did not want to take any more heat after an excursion.

Let's analyze this:

1. If the trade did not work it would have cost me 3.25 points.

2. If the trade did work and I got stopped out break even it would have cost me 10 points.

Which is more costly to my equity curve?

I am going to invert my risk assessment for a while and start thinking of my risk in terms of "how much does it cost me to not take a trade and how much does it cost me to go break even on a trade that would have won"?

My #1 problem in trading is not my trade selection, it is my trade management.

The defensive break evens and skipping of setups must end today.

My trading experience tells me that the next trade I take will test this edict and have a likelihood of a negative outcome based on chance. I am ready for it.

There are 2 key observations today as well:

1. The trades that seem like they are optimal are often the opposite and do not work out.

2. The trades that are tough to take and look the worst intra-trade are often the home runs.