Since starting this blog I’ve been able to document a few of the mistakes that I’ve made over the years trading the financial markets.
There was the time that I lost money buying Alibaba shares even though I pretty much picked the bottom.
There was also the time I accidentally left a stop order in the futures market – which got filled while I was asleep. (This during the most volatile period of the last 50 years).
This time, I’ve managed to pull off yet another rookie error trading rough rice futures and paid for it through financial loss.
A Losing Trade In Rough Rice
At this point, your first thought is probably ‘what the hell are rough rice futures and why the hell are you trading such a thing?’
Those are good questions and I don’t have good answers.
I have never traded rough rice futures before and I don’t know much about it.
But despite that, I went ahead and bought some on Thursday morning. I entered around 12.08 on a breakout and I put my stop at 11.96.
Sure enough, rough rice went straight to my stop level then reversed and finished the day higher than where I’d bought it initially.
The Experimental Trade
You are probably wondering why I placed this trade and why I put on such a tight stop. What was my reasoning or thought process?
The reason is actually fairly simple. I had succumb once again to that old friend, greed.
The truth is that I have been working with a new strategy the last couple of weeks and seen some crazy success with it.
After a couple of backtest results and a couple of winning paper trades I thought I was on to something big. Could this be the holy grail?
Caught up in gambling fever, I decided to skip my usual validation process and proceed straight to live trading.
“What’s the point validating something that looks so good? I want to trade this strategy on the live market before anyone else finds it!”
But, of course, because this was a strategy I had not validated or backtested enough, I did not know how to trade it. I didn’t know the details yet.
I didn’t know how long to hold, how much to bet or where to place my stop.
And so I went back to my bad habits. I bet too big and I placed my stop loss far too tight.
(This is a problem I have had with my trading since the beginning of time and I have only been able to get past it by using a system backed by data).
To put it another way, I treated this trade as an experiment.
And because it was an experiment I wanted to contain my losses. So I put my stop far too tight and in doing so practically guaranteed myself a loss.
Sure, the loss wasn’t that big. But the trade hurts precisely because I fell back on bad habits that I know exist and have worked hard to overcome.
I could have had a hard fought profit but I took an easy loss.
It was exactly the same as with my Alibaba trade and countless trades before that. I did not give the market enough room and so I lost money in the most unprofessional of ways.
I am sure that many of you have also made the same mistake in your own trading.
So What Can You Learn?
With this trade I had the beginning of a strategy but it wasn’t a complete strategy. Because of that I made mistakes.
In hindsight, I should have backtested this system more thoroughly, paper traded it, stress tested it and gone through the usual validation process I outlined in the system traders feedback loop.
That would have told me how much size to take and where to place my stop, so that the chance of getting stopped out was minimised.
And then I should have committed fully to the trade with the right stop and correct risk, giving it the best chance of being a success.
Next time you attempt to trade a half-baked system, remember this lesson. It might just save you a few quid.
If you are interested in complete trading strategies (not half-baked ones) make sure to check out our program at Marwood Research.