Beware the ‘Siren’s Song’ of quick and easy profits.

You start your trading day with the best of intentions: – You intend to buy low, sell high, then sell high, buy low. – At the end of the trading day you hope to have booked a tidy profit, and so added further to your P&L, before repeating the same the next day. You aim to be disciplined, steady, focused, you do not want to get sucked into buying near the top, selling near the bottom, cutting your position just before it turns, snatching at quick profits, only to run large losses, and then walk out the office questioning ‘why the hell you did what you did?’.

 

How did you fell reading that passage? Were you upbeat at the beginning? - Thinking ‘yes, this is what I like’? Towards the middle bit did you find yourself agreeing with the principles? However by the end were you a little bit deflated? Did this sound all too familiar? And did this echo all to often your trading day?

I can look back over my many years as a trader and recall this sort of pattern during some of my less successful phases. – I thought it applied almost exclusively to me. – Over the past couple of years however, working with and coaching other traders, I have come to realise that this sort of pattern is incredibly common. The best of intentions can get jettisoned the moment we sit down and look at the screens. – The ‘siren’s song’ of quick and easy profits is there to always entice us off course and smash our trading performance to pieces on the rocks of despair. The following is a fictional account of how this ‘siren’s song’ may play out over the course of a trading day. This account is accumulated from many years personal experience and from hearing the travails of many a trader. It is worth noting how the trader is led astray and deviates from his original course of planning to go long on a pullback. Also see how the trader’s personal trading rules are scuppered, and attempts to navigate his way to safety, lead to the trader undermining effective risk management. Finally notice how the trader’s judgement and decision-making abilities are compromised leaving the trader stranded and relying on nothing but hope.

The script may go something like this: -

Bund (or DAX / S&P / Treasury / EURUSD -whatever your poison is) is up for third day in row, its rallying, trader thinks ‘I want to get long of this, it is heading higher, but its looking a little tired, I think I’ll wait for a pullback, when that happens I’ll get long’.

-          Have a coffee –

‘Ah another leg-up, did not see that coming, but now its overbought and approaching some overhead resistance, maybe a good sell here for a few ticks’ -  Trader sells 50 lots. - It comes down a little, - ‘I knew it, perhaps I could make a tidy sum on this’ – ‘Doh - its back up, but still looking tired though, maybe I’ll sell a little more, there is good size on the offer, not much on the bid, this could puke any second now.’ -  ‘Damn, where did that bid come from, all offers taken out - this is soaring’ – ‘F*ck, its getting close to my stop, bloody algos, they knew I was short’. – ‘Shit my stop is approaching, I know its going to get taken out, right I’m cutting here, if I’m going to be stopped anyway I may as well cut here and save some P&L’ – ‘Right I’m out, flat now, and saved a few ‘bob’ compared to where stop would have been, that feels a lot better’.  – ‘Going go over road to Starbucks, back in 15 minutes, could do with some air anyway’

-          15 minutes later and back in the office –

‘WTF, its right back down, never even hit my stop’ – ‘Agggghh I’m such an idiot, its puking, and I’m not short, if I had just stuck to my original stop -  aggghhhh’. – Right as I said in first place this is going lower, I’m going short in twice the size, make up for the missed P&L, I can still make this work for me.’ - ‘Right short now 100 lots, this feels better, I got my short on again - I can see the profit in front of my eyes, - can relax a little now, just let the market do the work for me its moving my way, feels good, hmmm’ –

‘Now where do place my stop on this, can not have it as high as before, as I’m in twice the size, but I would like it up there as I know it is just above a key level, but on the other hand I’m risking too much on this size from where I entered, and got the earlier loss already. - OK I’ll have to bring it down a little lower this time, it should be safe anyway, after all I’m convinced this is heading lower - its not going to be taken out.’

-          A short while later -

‘ Hmmm, not doing much all of a sudden,  seems to have stalled a little, I guess a little retracement is on the cards, I suppose this means it could rally a little before dumping, I’ll try and capture some of that rally, make a little bit, then get short again. - Ok lets buy some here, get a little long, not too long, as it is only a small move.’ – ‘F*ck, its going down, I’m long now ‘bloody algos again – they knew I’d gone long’. - ‘Right I’ll wait for a small pullback, try and break even on this last bit, then I’ll be back short where I want to be.’  – ‘OK its coming back up nicely, just a couple more ticks… damn someone has hit it, this is not coming back, quick get my short on only 50 left on the bid, missed it damn -  aggghhh this system is so bloody slow, next bid gone too aggghhh, right just hit next bid – done it.’ – Aggghhh its bounced a couple of ticks, why didn’t I just wait a minute, well at least I’m short now once again, that feels much better, a small loss on that last bit, but I got the right position on again, and I sense I’m going to make some serious money on this, and get all today’s loss back and some - happy again!’.

-          From the squawk-box – ‘Rumour of Medley Report, should be bullish for Bunds’.

Market spikes up. - ‘Shit, shit, shit - what should I do, - last time this happened it faded away and had no real impact then dropped sharply, this may actually work in my favour, I think that this could happen again, - stay with it.’

-          Slowly comes lower back to almost where it was at time of report comment. –

‘OK, as I thought, this is the right position, nice hold by me ‘am I good? or - am - I -  good’?’ – ‘Ok this is trickling up a little again, should start to fade soon and then dump’. 

– Continues to trickle up. –

‘Right stay with it, this is a little painful, but there is not much going through, should fade soon.’

-  Continues climbing slowly. –

‘Surely this should run out of steam soon, perhaps if I sell some it might knock it back down, there is so little size on the bid, hhhmmm. -  No what am I saying that never seems to work, and I have not got the size for that, and I think it will run out of steam soon anyway as this has nothing behind it. - But my stop, it is approaching it now, and this is not a major level, I know what will happen - it will just go through it by 1 maybe 2 ticks, takes me out, and then back down, and I miss out, how I can let that happen? - But my P&L - I’m closing in on my daily loss limit - but I’ll kick myself if this stop is triggered and then this pukes – bloody decisions.’ – ‘Right, I’m moving stop to original level, - ‘in for a penny in for a pound eh’. 

‘Ok, my original stop has gone by 1 tick and its back a few ticks lower now, - I knew it, brilliant, got it just right, should see this start to head down now, it may even collapse.’

-          Starts to climb again slowly –

Agghhhh, it’s broken through my original stop, damn maybe I should have kept it there and been done with it, this is not going lower. - What to do now, its costing me some serious P&L, I can’t even look at my account balance, I know roughly what it is, I don’t need to see today’s figure in writing. – Should I cut now ahead of my new stop? But - then what was the point of moving it in first place, and if I cut now and it does not go through it, as happened like last time, well then I’ll be even more bloody furious. - But if it goes through the stop then the loss will be well through my daily loss limit - more bloody decisions.’ – ‘Right I’ve decided I’m going to leave it, but I’m not going to watch it, I’m going out for a coffee, then I don’t have the agony of watching it, - it might even be lower by the time I get back’.

-          30 minutes later and back in the office –

I bet it’s stopped out. – Lets look at my screen, here goes - I knew it, bloody thing, it has gone right through my level and is flying. – I knew this was going up, I said so this morning - bloody knew it. ------ What is the matter with me, I’m going home.

-          Storms out the office, angry, annoyed and with a severe dent in his P&L. –

 Will the trader learn from the experience? or will it happen all over again in a similar way? -That may be the difference between success and failure in the long run. - Meanwhile the trader heads home, with the question ringing around inside their head - ‘Why the hell did I do what I did?!?!’