Tuesday, April 20, 2010

A few trades and the psychological fallout

Yesterday I put on two new trades and before I could even make the time to post them I had already closed them out. The first was I sold May $17 puts on (BAC). I was tentatively looking for an entry point at $18 to write covered calls, but when it hit $18 yesterday I liked the price of the $17 puts at .38. I was more than willing to own at $16.62. So I sold 10 contracts, then this morning they are trading at .19 so I'm thinking I lock in 50% of the max gain in 24 hours with more than 4 weeks left until expiration. Though the original intention was to hopefully watch them expire worthless, once gain I changed my mind. But then shortly after I'm already questioning myself as to if I liked it when the stock was at $18, shouldn't I like it even better when it's at $18.50 and moved in my favor? I feel like having a plan doesn't mean anything if I'm going to over ride it 24 hours later.

I also did the (POT) put spread sale that I saw on the IWO market primer. I actually put it on myself Monday morning before he sent out an alert. Now here is where I go off the tracks again. So I can make a case that when you can take 50% of the max gain in one day and take off 100% of the risk that kind of makes sense, or at least I'm comfortable with that. But on this trade I only make about 40% of the max gain but I still took it off, not because of the percentages, but because the green box on my screen was flashing an unrealized gain of $300 and I wanted to lock it in. Here is where things get even crazier. One of the reasons I wanted to take both these trades off the books was because they added up to close to $500 and I knew I was going to have a dentist bill for about $500 today to get some fillings done.

This is just insane, complete mental masturbation accounting. The psychological aspect of what I do makes no sense to me. I don't know how I get passed the point of having a plan or a risk management thesis if I'm the one left to actually implement it. The actual fill prices of the POT trade only netted me $275 and not $300. When this happened I felt like I wish I had left the trade on. So I'm happy with a few booked trades with profits of about $450, but clearly there is still no method to my madness and there is a lot of work to be done.

Here is another area I need to address. Both of these trades today happened because I logged on during the day to see what was going on, I tend to do this more often when I have a trade on than when I have nothing on. Had I been busy today or not able to check, I wouldn't have cared. I looked at the closing prices yesterday and its not like I told myself that if if the stocks move in my favor a little bit today I'm going to close these out, but that's exactly what played out. I can make a counter argument that if I don't have time to fool around and look for opportunities sometimes, most of these trades wouldn't even happen in the first place. I think ideally I need to get to a place where I'm busy full time during market hours but make time each night to check in and make decisions when the markets are closed. I'm struggling to find a system of overall portfolio management and its frustrating me a bit.


  1. I completly understand your frustration. I still struggle with the same thing. I put on a trade and set a certain profit target and at the first sign of green I am anxious to take profits to lock in gains. But from all the changes I have made in the last 6 months I have realized that in order to fix the problem you think you are having is acknowledging it, writing about it to internalize it, and then setting a goal to fix it.

    One area that this has helped me drastically is in my risk management system. I use to hesitate and stall to close out a losing trade only to let the loss get worse and sometimes out of control. But after acknowledging it and writing about it I set up some rules in my trading business plan back in February when I experienced what I considered un-acceptable losses. Since then I have worked dilegently to cut my losers once my stop is hit no matter what. I don't even think twice.

    So now I need to do the same thing on the winners. Which is why I set the goals I did in my last post. So I guess what I am trying to say is that you need make a concious effort to create change. And maybe your trading plan says that if you can capture 50% of the trade within a certain time frame to close out the position and move on to the next trade. By preparing for different scenarios you are better prepared to manage any given position.

    We all have the mental accounting thing going on and to be honest it is probably to our detriment. It is what causes us to leave money on the table, making decisions based on factors that are irrelevent to the trade. One thing I am doing to counter this is I have removed my P&L off my IB screen when I log in. I do not want the P&L to drive my decisions. I want to set a plan and execute the plan.

    It will get easier once you get the time to write out your business plan. It will truly help you internalize your system.

  2. Wow, that is an excellent idea! I would have never thought to take off the P/L column. Although looking at a raw quote I will surely do the math real quick to see where I stand, but I do think seeing the live green box has affected my on the spot decision-making. I am going to give this a try and see if anything changes. Just another intangible that the blog has created. Thanks.

  3. Just reviewing your previous posts......

    I took out my P/L column from my order screen a long time ago. I also use black electrical tape on my screen where the "daily P/L" is posted. I never look at it intra-day. Why would you? Another little trick that I like was to color code "down" bars and "up bars" in all white, gray or blue. No screaming greens or scary reds....all of this to eliminate the emotional connection. Remember: Human emotion = losing trade.


  4. Wow, I didn't even remember this post. I read it again just now and realized how far I've come with the psychological approach to my trading. I used the feature on Think or Swim to make my account balances all xxxx's instead of numbers. That was a game changer for me. This is the reason I was originally interested in the idea of the blog was to create a permanent record so I couldn't forget or lie about things down the road. Perhaps I should revisit my old posts periodically to see just how I've grown, and where I'm still perhaps falling short and repeating bad behavior.