Asymmetry

A general principle in trading for me is that without thorough investigation, comprehension, and experimentation leading to full acceptance, no trading rule or system can be properly executed. If one cannot completely understand and embrace the reasoning behind some method or axiom, whether internally discovered or externally given, the reflex necessary to act without further thinking or doubt is fatally compromised -- the circuit between the eyes watching the screen and the finger on the trigger cannot afford even the slightest impedence.

One area in my trading which I've been struggling over has been the disparity between the success of my entries versus the failure of my exits on profitable trades. If I had the ability to accurately anticipate and identify the origins of a move, why were my attempts in capturing and keeping the bulk of the profits so horribly inept? Why was my timing in closing trades so blatantly pathetic in comparison with their openings, to the point where I would either consistently stop-out on the lows of retracements, or conversely wind up giving back the entire move if I tried to avoid getting shaken out. To deal with this I began devising systematic approaches to my exits to serve as patchwork fixes, but I knew such arbitrary remedies that had nothing to do with my entry methods could only be temporary at best. What I needed to answer for myself was the following question: shouldn't one's edge in reading and timing a market apply to both entry and exit equally by default? How could the gap between the two be so wide?

Sometimes it's the most obvious things that are easiest to overlook; although it did not take long to find the answer after committing some thought, many good profits had needed to be sacrificed before the right question had been asked. In any case, what I should have realized long ago was that there was a built-in asymmetry in the way that I traded that naturally skewed my perception of my entries versus my exits. First off, since I use extremely tight stops relative to my time frame in opening a position, any trade that survives that stop to reach a certain level of unrealized profitability would necessarily have a well-timed entry, as the typical volatility or "noise level" in any of the markets I trade would stop me out 95% of the time if I do not catch an immediate move in my favor. But more importantly, on a methodological level, the use of tight stops has forced me to become extremely selective in my trading setups, to the point where a number of coinciding events (technical, temporal, psychological) are required for me to pull the trigger. These syzygistic ($.50!) occasions are relatively rare, and a resulting trade that yields a significant open profit rarer still. What I failed to realize while holding on to those open positions was the fact that I was wrongly expecting the same alignment of stars (in mirror-image) to provide the perfect exit signal; whereas with entries I could wait patiently flat on the sidelines for optimal setups to materialize, I could not afford such a degree of exactitude while still holding a position. It's a given that I overlook or miss out on countless number of market moves in my time frame; therefore I should not expect to catch the perfect exit point at the conclusion of a move just because I happen to have nabbed a decent entry at its beginning. In fact, I believe I can make that leap to say that virtually 100% of my edge as it exists now applies to entries only, while on exits I probably can count on doing little better than random on any given trade until further investiation. To say the least, I think this realization counts as an important step in understanding my edge, as a heretofore unseen profile of my method has finally revealed itself to me (as I type these very words -- three cheers for blogging!), and a cloud of uncertainty lifted.

So what are the implications of what I have learned? The most immediate that comes to mind with coming to terms with asymmetry is an acceptance that my exit methodology may necessarily differ from my entry. I will most likely continue trying to align my philosophy for ending a trade as closely as possible with its opening impetus, but I will no longer have qualms in implementing "arbitrary" devices in the interim. Ironic as it seems, I've also discovered that having greater faith in one's fallibility may actually result in a diminishment of doubt in one's actions -- bonus.

Persona

After identifying, analyzing, and classifying my edge, I thought it would be a simple thing to finally answer the question: What kind of trader am I? For to succeed in the markets, I needed to know exactly what I was bringing to the table each and every morning without question, in order to trade with confidence. Yet breaking down the elements of what constituted my edge revealed a contradiction that needed to be resolved before I could properly move forward.

As I noted in my previous post, I'd categorized my performance according to time frame, ranging from intraday setups to position trades lasting weeks at a time. Overall, I'd found that cumulatively my biggest source of losses came from spur of the moment trades, while the most profitable ones lasted at least a few days and were pre-planned relatively well in advance. So naturally I began shying away from pulling the trigger on any "Intraday" category trade, while concentrating my efforts on looking for the next "big" move. But as I shifted to a longer mindset and paid less attention to the tick-by-tick gyrations, I became increasingly aware of the pitfalls of the longer-term. Holding a position and having a pre-determined opinion colored my objectivity; although I was doing less trading on an intraday basis, there were still premium signals in the short-term that I would end up ignoring if the direction went counter to my overnight position. I was becoming slow and reluctant in acknowledging and incorporating information that contradicted my bias, and I found myself fighting the markets more and more often as they continued to move against "scenarios" I'd developed and grown attached to mentally -- a very costly habit!

I'd thought the longer term was the "correct" time frame for me, yet my results began to betray that assumption. I started to miss the mental freedom of being a purely short-term opportunist, not having to worry whether or not my stops would be hit overnight on some meaningless spike or bracing for how the next economic number would roil my account equity. But wasn't I right in refraining from trading off the short-term flickering ticks, given my past performance? Coming in flat every morning and looking for opportunities off the cuff made me "trigger-happy" as I tried to make each day count; the tendency became to push alot of trades yet each with little conviction, exposing myself to frequent second-guessing and trading for frustration's sake. In contrast, position trading taught me patience in both selectivity of trades as well as profit-taking, yet I'd sacrificed the objectivity needed for instantaneous reaction that is the advantage of having "no opinion".

This dilemma between two contrasting styles became my obsession over these past few weeks, as I became aware that the only thing I was certain of was the absolute need to resolve this question of trading persona. Both sides had their advantages and disadvantages in regards to my abilities and mental tendencies -- the more I racked my brain over it, the more impossible it became to decide. But something finally dawned on me as I pored over my trading results over the last several months. As I oscillated between the two poles in my trading, the further I swung towards one end, the more disproportionate the negatives of that approach would become. It suddenly became clear to me that this was not an either/or decision; instead, I realized the necessity in incorporating both approaches in order to capitalize on the advantages while simultaneously minimizing the disadvantages. I needed the sensitivity of the tape and a finger on the intraday pulse to properly glean the next major pivot and find the optimum entry point; I needed the longer term outlook to keep proper perspective in distinguishing day-to-day signal from noise, and to keep a higher level of selectivity on my short-term transactions. Most importantly, I had to maintain that freedom of opinion and quickness of action at all times, despite whatever I may be holding or have anticipated to occur, for having freedom from one's own opinion is the definition of the ideal market opportunist.