Fail To Follow Your Trading Process and Degrade Your Trading Edge
Here’s what can happen when you don’t follow your trading process. As all traders should understand, trading is largely a game of probabilities. To be successful in any game of probabilities (think, casinos), you have to follow a process. It is by following your trading process, for example, that you take the next trade that sets up, even though the last five setups were losing trades. If you allow your mind to engaging in emotional reasoning and not take the next trade for fear of another loss, you miss out on the win (perhaps a large one) that the next trade produces. By failing to follow your trading process, you change the probabilities of your trading edge. In other words, when you don’t follow your trading process, you degrade your trading edge. Although it feels quite differently, in a very real sense, you are trading random.
You Can Fail to Follow Your Trading Process When You Feel Good, Too
You can fail to follow your trading process in the opposite direction, as well. It’s not just when you feel down and negative about your trading that you can fail to follow your trading process, it’s also when you feel good. When trading well and we feel good about our trading, we tend to let our guard down. Its at these times that we become vulnerable to not follow our trading process. We may start taking trades that don’t meet our trading criteria, trade with greater than normal size or take other actions that not only degrade our edge, they can dramatically increase risk as well.
Case Example: Failing To Follow Your Trading Process
Continental Resources, Inc (CLR) provides a current example. Continental Resources is one of the country’s largest shale oil drillers. For protection against price variability, the company normally hedged future prices. Instead of following its normal process, however, the company deliberately lifted it hedges against falling oil prices. Seeing a chance to make a windfall by ‘monetizing’ its hedges, the company lifted its hedges going out through the end of the 2016 futures. (For more, see this Reuters article).
We all know what has been happening in the oil market. Continental was hit hard. Less than three months ago, CRL was trading as high as 80.91 (note that technically, it was well overbought and was experiencing a weekly Wyckoff UpThrust at its highs!). Friday, it closed at 38.23. The mistake of not following their process by lifting the hedges they already had in place cost the company more than 50% of its value. Ouch!
Follow Your Trading Process
Process is crucial in trading. You must have one and you must follow it. You process is the only thing that will protect you from silly mistakes and from Black Swan events like what happened to Continental Resources. In my new book, Trade Mindfully, I detail a trading process complete with the mental aspects of following that process. I don’t know any other trading books or references where process applicable to active trading is discussed. Trade Mindfully is now available for shipping at Amazon (and is also available as an e-book).
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