Anticipation Kills

Today I was planning a trade in the S&P500. In my AM prep I said:

Main trade I am looking for here is a medium term down leg that starts with a HL being developed and held. The trade really is not "on" until back below weekly bear LIS. But, failure to get back above our bear node here will be key.

This is what it looked like:

As the session progressed, we got back above the node and started to chop around quite a bit.

I started to think the trade was off and we were not going to get it. Then suddenly...

Impulse down:

Here I got in short and was looking to add to the trade. I did so as it re-tested the bear node from below. Beautiful. However, we spent almost 45 minutes sitting there. Starting to creep higher and higher. Leaving incomplete auctions at the highs and the selling pressure started to give up. Eventually, I scratched the trade, booked my profits from the first entry and walked away. I thought that I had given it plenty of time to go and if it was not likely to go now, my opportunity for the rest of the session is quite limited. As the market started to put in a higher high I walked away.

This is what the execution looked like:

Looks like a great trade... right? Caught most of the move, gave it the chance to give up, as it failed to push lower exited. However my final target was much lower.

I walked away for two reasons:

  1. I had taken many stabs at this idea already and given up some PnL on it. Was exhausted of it just refusing to go.
  2. I had given it three highs (two of them incomplete auctions) and it was becoming an insecure high. Odds are we put in a new high and take in from there.  (which we did... but then...)

Moments after I walked away from my terminal:

As you can imagine, I was quite upset with my self. I had walked away just as it turned around and continued to my destination. Yet, if I just look at the executions and reason to exit prior. It looks like a rational decision. This is the beast that is the market. There is no easy answer.

There is a case to be made if I had more mental capital, I would have stayed in, if I had more trades left, I would have stayed and accessed the downside trade.

You can be 100% right on the move, and still not get paid.

What am I doing about it?

In review, I have identified a key error that led to the result. This was the common error that plagues my trading of anticipation. The initial short that looks like a great entry, well it was above my bear node. This was because I had my medium term thesis and saw the short term was starting to align again. However I had already taken a few stabs at the idea above the bear zone that did not work– sacrificing mental capital.

See, it was the trade that made me the most money that in the end that cost me the most. Yes it output PnL, but the same logic behind that trade lost more PnL and more mental capital. It is an expensive trade and an expensive error.

An alternative situation would be had I just started stalking the trade once we fell below the bear zone. Mind fresh and eager to engage. Sure I would have likely still been stopped on my initial entry but it would have required far less mental capital to stick around. This was just the start not the end of that idea.

It is not okay to take a trade before it actually breaks your level. You feel like a genius when you are right but boy can you get chopped to high hell before getting it right. If you are shorting a level and you are above the level, where are you wrong? Where is your stop? Exactly.

My focus going forward is not better trade location or better executions, it is better qualification process to preserve both risk capital and mental capital until the trade is truly 'on'. The biggest problem here is being willing to let go of the moves in the market that you do not have access too but which you did. That initial entry was a non-valid entry, a process error. It worked out and was a 'winning' trade but a terrible idea that lost more today than it made on that one occurrence.

This means that as much as I think something is likely to happen, I cannot jump on board until it is valid within my access plan. Until then, it is just an idea my eyes are visualizing on the right edge of the chart.

no free lunches... damn right