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.