Avoid Simple Traps in Trading 

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Avoid Simple Traps in Trading



There once was a trader who adopted a trend-following, position trading approach and was quite successful. His approach was to generate a trading order for the next day after the close of trading each day and to always follow his system. Although he was not a day trader, he obtained real-time quotes from his data vendor, ostensibly to keep better track of his successes. One day, in the midst of a strong intermediate-term rally, he was long four contracts of Lumber with an order to sell short at 4080. In the opening minutes of trading his order was hit and he was reversed into a short position. A few minutes after that a report came out that caused Lumber to soar higher by almost its full daily limit. Suddenly this trader was down $3,712 on four contracts in just a matter of minutes. Completely distraught he tried to figure out what to do. Should he cover his short position immediately? Should he hold on? What is the proper course of action? Fearing that the market would "lock" limit higher, he covered his short position and went flat. Would it surprise you to learn that by the end of the day, Lumber closed back down exactly at the price at which he had shorted it earlier that day? The next day Lumber opened sharply lower and just kept sinking. Instead of losing a little on the first day and holding a profitable short position the next, our trader suffered a loss of $3,712 and could not bring himself to get back into the short position, thereby missing out on a subsequent $10,240 profit. His momentary lack of discipline cost him $13,952. Ouch!

Where did this trader go wrong? Two things come to mind. First off, if you have made the decision not to be a day trader, then live quotes can be a very dangerous thing. To the undisciplined trader a quote machine can be the equivalent of a slot machine. You see the opportunities flashing before your eyes and you feel compelled to play.

Also, based on his trading approach, by all rights the trader in this example should not even have been aware of Lumber's intraday gyrations. Had he been off reading a good book instead of staring at his quote screen he would not only have saved himself a considerable sum of money, but also all of the emotional angst that went with watching the market move sharply against him, arbitrarily deciding to bail out, and then watching the market move back in the right direction without him being on board.

The second error this trader made was in failing to adhere to his approach. His system told him to be short, but he succumbed to fear and stopped himself out at the point of maximum pain. The markets do not know that you are long or short and certainly do not move in a particular way simply to inflict pain upon you personally. It just seems that way sometimes.

One key to longevity is to know the following: The markets will frustrate you and inflict pain upon you from time to time. This is simply a fact of trading life. The trick is to not frustrate nor inflict pain upon yourself. The markets are going to do whatever they are going to do and there is no way that you can control them. The only thing you can control is your reaction to market events. Your best bet for doing so is to have a well thought out plan and to follow it precisely. If you succumb to fear or greed or ego you become your own worst enemy. Knowing yourself as well as you do, do you really want you as your worst enemy?





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