BarroMetrics Views: Hubris & The Trader:

Unlike any other profession, in trading, a misstep can cost us dearly.  Just the other day, that was again brought home to me and in no uncertain terms.

For my personal trading and large fund, last year was the best year I had  since I started managing funds in 1990. The run of success has continued in 2011.  I suspect that the improved results have much to do with some new ideas (I call Square Theory) I implemented in 2010. I say ’suspect’ because the results could be due to the fact that market conditions have suited the approach.  But I digress…

What I wanted to say was:…. the other day, I got into an AUDUSD trade that was pure hubris. I jumped in because I had missed the earlier entry and as I saw the market tank decided I could not wait for the rally my method wanted to see before entering. My entry was brought about not only by my fear of missing out but also by the thought: “I’m so good now, the market will move the way I want it to behave (!??)”.

So I just jumped in and at the same time, jumped in without carrying out the risk management and position sizing process I normally adopt. The end result was I stopped out on Jan 19th. Figure 1 shows the ’stop-exit’.

Now the first bit of good news for this trade is I lost only 3%. In my newbie days, I’d have probably lost much, much more and I’d probably not just stopped out but would have stopped and reversed!  The second bit of good news, is as soon I exited the trade I analyzed the market and created a bull and bear scenario for the night.  So, when the AUDUSD started to tank, I had a response ready.

The point of this tale is to show that we traders need to always be on our guard; we need to consistently complete the processes we have in place for all trades - the same processes that brought us the successes we have enjoyed.

FIGURE 1 AUSUSD

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