Introduction

Since my last post about my current trading slump I have lost another -$982.25. This isn’t too bad considering over half of that loss came from One Bad Trade I made in BIDU last week. This year has been very difficult for me. I have been in the process of honing my skills and focusing on specific trade setups. My weekly results so far this year are as follows: -615.82, +130, +543, -1,080.87, -440.42, -1,180.50, and +395.5. Not the best results, I know. However, there is a little light at the end of the tunnel. The last week’s performance really has me excited about my progress. What’s so exciting about making $400? I’ll tell you…

I admit, the profit isn’t that great, but that’s not important. How I got there is what really has me excited. How did I get there? Two words…Trading Probation. What is Trading Probation? Simply put trading probation is the act of cutting back your trading and risk during a losing streak or a time of market uncertainty. Oddly enough I have been going through a rough patch while the market is simultaneously in an extended time of uncertainty. This is the perfect time for me to take a step back and make some changes.

In January I made a total of 104 trades turning 36,400 shares and February isn’t far behind with 87 trades and 20,040 shares traded. I know this isn’t a lot for some guys like DT and Evolution, but I think that I have been overtrading. I was able to trade actively with success in November and December, but the market conditions were much different then. For me, January didn’t offer the opportunities that I was used to, and since I wasn’t concise in my objective, I got chopped to death. February has been a little more directed, but I still felt that I needed to slow down and regroup. So, after having a discussion with Stewie I decided that last week would begin my Trading Probation.

Rules

As is the case with anyone on probation, there were certain guidelines that I had to follow during my probationary period. I tried to setup these rules in a way that I would be risking very little capital initially. Here’s what I came up with.

Rule #1 – I can only take one trade each day for the whole week
Rule #2 – Each trade must be the absolute BEST trade that I can find
Rule #3 – I must look for Holy Grails with supplemental price pattern formations
Rule #4 – Max size of 1k shares scaling in with 200/200/600 and out with 500/500
Rule #5 – If a trade is not working out, exiting on a time stop is preferred to a hard stop exit

After reviewing the rules, I made one important change to Rule #1. Instead of taking only one trade a day, I adjusted the rule where I would only take one full size trade each day, adding the flexibility to take 2-3 mini trades with 50-100 shares each. To keep from being too lax, these mini trades also had to be near-perfect setups with minimal risk.

Results

Now that you know the rules of the game, here are the results for the week. In four days I took 11 trades with a total of 2,050 shares netting +$395.50 after three consecutive losing weeks. Out of those 11 trades only one trade was with full size with the remainder being mini trades. I only had one losing day out of four and that loss was only -$9. My individual trade results are as follows. Out of 11 trades I had six winners and five losers giving me about a 55%win rate. The real edge in my trading can be seen in the individual P/L. The numbers show that I have been able to keep my losers very small which really helped me keep the profits from my one full-size winner.

Losers: -7, -11, -15, -19, -26 Winners: +17, +29, +38.5, +78, +80, +234

Review

Even though I am somewhat disappointed with my overall profitability for the week, I am very please with the numbers. The fact that I only took one full size trade this week is a little bothersome. There were many more opportunities out there that I could have taken advantage of, both long and short, which would have dramatically improved my P/L. However, I am beginning to realize that my system is setup in a way that I end up passing up a lot mediocre opportunities (unless I take these with small size) to focus my attention on the best trades. Many other traders out there make money buy increasing the number of profitable trades while my system decreases the overall number of trades and aims to increase the profitability of each trade. Knowing your system and where you edge lies is a must in the trading world, but its not enough to just know your edge, you have to be able to exploit that edge with consistency.

The most important thing I took from this week of probation is patience. When you can only take one trade a day, it forces you to pay very close attention to the details. I found myself watching prices very closely and seeing ahead of time when and where a setup would happen. I was able to anticipate the trade and this gave me more time to analyze the specifics to see if the trade had merit before it even happened. This anticipatory analysis is something that I am not accustomed to. The way I was trading before required me to constantly scan the market for setups and when a trade presented itself I had very little time to react. I also had to go through chart after chart and filter out the bogus signals which took up a lot of my time. My other ace in the hole was my time stop rule. Giving myself the flexibility to scrap a trade before my stop loss was hit saved me on three occasions. If I hadn’t utilized my time stop rule I would have lost another $60 or so. Of course, if I had to use a time stop on a full size trade the savings would be substantially more.

Conclusion

After a week of probation and spending a few hours reviewing my trades and performance, I have decided to extend my probationary period for another week. During my weekly review I found some issues that I need to work on, namely missed opportunities. Although I have honed my system down quite well, there are always places for improvement. There were numerous setups that would have worked great, but for one reason or another I was not able to take advantage of those. In addition, two of my losing trades were “discretionary” and not at all part of my system. At this point in time I feel that I need to avoid all discretionary trades and only take what my system deems as tradable. Going into next week I will need to work on taking advantage of opportunities by more accurately reading my indicators, and keeping myself in line and away from discretionary trading. I would recommend that every daytrader take at least a week of trading probation, it will clear your mind and give your more focus and direction.