Getting Sloppy When Winning

John Welsh has an excellent post here regarding the psychology of trading loss, and how people tend to increase their position sizes to try to make losses back...only to compound their losses.

I tend to have a different problem...a problem that I need to work on if I'm going to be successful at this long term.

When I'm losing, I'm usually pretty good at not increasing position sizes or trying to make back losses.  My problem is when I'm winning.

When I'm winning, I find I have a tendency to get sloppy.  I know I have a cushion, so I trade more aggressively...but too aggressively.  I start to fudge on my trading rules.  I start to lose discipline.  And I end up losing my winnings.

I wrote a bit about the great day I had last week that put me over the PDT.  Everything was going fine until Friday...and that's when the sloppiness started.  I started breaking a number of trading rules, and it cost me most of last week's profits.  Here's the rules I broke:

1.  Too Big of Position Size.  I follow Van Tharp's model of position sizing.  This means that, wherever I put my stop loss, I should not lose more than 1% of my total trading capital if that stop gets hit.  I have a bit over $30K in trading capital, so that means I shouldn't lose more than $300 on any trade.  That also means I should size my positions accordingly.

I broke that rule on Friday.  I was down about $500 for the day (my only red day of the week).  I shorted ASTM around $4.03 when it looked like it was doing an afternoon fade.  I put my stop above the HOD which was 4.23.  That's a 20 cent stop, meaning my position size shouldn't be more than 2000 shares.  However, I got aggressive, shorting 3000 shares in my IB account and another 700 in my Speedtrader account.  It ended up being a fake fade, and I ended up exiting after hours (right before it tanked) at 4.24 and took a $600 loss (I held the position in Speedtrader).  If I had stuck with only a 1000 share position in IB like I should have, I would've been out only $200.

2.  Not Exiting on Exit Signals.  I like to use a 10/60 cross to the upside on the 5-minute chart as an exit signal that a stock is not breaking down as I would like.  With ASTM above, there was a 10/60 cross around $4.13.  So I would've been out 10 cents rather than over 20 cents on the position.  If I had used the position size that I should've used, my loss would've only been $100.  I also broke this rule on Wednesday, November 17th, with BSFT.  I shorted 500 shares of BSFT at $17.96 when it looked like an afternoon fade.  But it continued to go sideways.  I got a 10/60 cross to the upside, and I would've been out at $18.05 for only a $50 loss.  But instead I added to 500 shares to my position on the EOD spike, and would take a significant loss on it a few days later.  Finally, I did it with ZAAP yesterday.  I shorted 5000 shares at 83.5 cents when it looked like it was fading.  But, like BSFT, it kept going sideways.  I could've gotten out at 85 cents for only a $100 loss after commissions, but instead I kept holding, and exited on the late day spike at 89 cents, losing $300 instead.

3.  Not Waiting for a True Breakout.  I like to go long 52 week breakouts on listed stocks breaking out on news, or on OTC stocks.  On November 15th, KNDI had a 52 week breakout on earnings.  It pulled back below the 52 week high of 6.70.  Rather than waiting for it to rebreak the 6.70, I anticipated it and went in at 6.62.  Well, it never rebroke it and I took a loss in the 6.40's.  This cost me over $300.  On November 16th, I longed BVTI on the $2 break.  2 was a resistance point, but wasn't the 52 week high.  The 52 week high was 2.11, which it never got there.  I ended up taking an over $200 loss at 1.89.

4.  Not Exiting on Failure of Reason You Got In.  On November 17th I shorted EDAP at 4.21 when it bounced green and was fading back towards red.  However, it failed to go red and started consolidating at green.  That was a cue to get out, but instead I held onto it until it broke the HOD's in the 4.40's.  So rather than a $150 loss, I had a $300 loss.

5.  Not Covering Short After Break From Consolidation.  On Thursday November 18th, I was short BSFT from 18.25 from the previous day.  It fell to the 18.20's, and then started consolidating.  It then started to break upwards off of that.  I should've covered for a $50 loss, but instead held and didn't cover until the next day at $18.62, increasing my loss to almost $200.

6.  Not Sticking With a Stop.  On Friday I longed CRM on the first break of $135.  It was a small position with a wide 50 cent stop.  It came back to my stop and I kept holding.  I ended up exiting in the low 134's for nearly a $300 loss, when I should have had a $150 loss.  I thought about relonging it when it hit 135 again but hesitated and it ended up going past 136.

Overall, trading too aggressively and not following my trading rules cost me over $1800, wiping out the majority of the great success I had last week.  If I had followed my rules, I would've been green this week as well (although not by a huge amount).  I generally have no problems with being disciplined after big losses...my problem is remaining disciplined after big wins.  That is the thing I need to work on.