Trading lessons from 2022

Before I begin, make sure you also follow my Twitter account, where I talk about market developments, new trade entries and exits, and anything that comes to mind in between blog posts. If you are feeling the holiday spirit and know some friends who might benefit from my blog, please share this with them!

I’m not just here to talk about the markets and share my trades. One of the reasons I started writing this blog was to help people become better traders. There isn’t enough trading content out there that focuses on the entire trading process, from developing a view to expressing it in a trade. Nor is there enough content about self-improvement as a trader, which is more about battling your own human weaknesses.

Here are some of my trader education posts:

The Axioms of Trading, form 2002

Master Your Emotions, Master Your Trading

Journaling Mistakes and Trading Mistakes

My story as a trader

At the end of every year I look back and reflect on what went right, what went wrong, and try to figure out how to adjust my trading to improve my results. Thanks to my journaling system, I am able to track statistics on my trades, and this gives me valuable feedback that I can use to improve myself. Identifying mistakes is only the first step. I can’t just slap myself on the wrist for making a mistake, and then continue on with my trading. Mistakes are made because we are human, and can only be prevented by improving processes and rules that make them less likely to happen.

These were my costliest mistakes, and what I plan to do about them.

Widening my stop and losing more than I planned

This usually happens for three reasons - I didn’t have my stop in place, and the market went well through my stop loss level, resulting in a larger loss than expected. This can be easily solved by being conscientious and inputting stops the moment you enter a position.

The other reasons are rationalizing a reason to widen my stop in order to give my trade more breathing room, or getting back into a trade after having stopped out. While this might work in my favor once in a while, my statistics tell me that this costs me money in the long run. I’m better off not adjusting my stops wider as a general rule, as well as giving myself a 1-2 day cool off period before getting back into the same trade.

Putting on positions that were too big (and adding to losers)

My worst loss ever came at the beginning of this year, when I was on the wrong side of the selloff in Treasuries. Instead of cutting the position, I was stubborn and added to it. I was convinced that inflation would roll back over, and that yields had run too far. The eventual stop-out was both painful and a relief. It was the largest single loss I had ever taken on a trade. The experience was incredibly humbling, because after two decades of trading and constant focus on discipline and process, I thought I was immune to mistakes like that. The fact is that I fell victim to one of the most dangerous mistakes of all…

Overconfidence.

Talk to most traders and they’ll tell you their worst losses came after their best runs. I made a 251% return in 2020, and by 2021 I was already salivating over the extrapolated profits I would be making if I could achieve triple digit returns every year. I felt confident about my abilities as a trader, but my performance had already started to slip in 2021 and I didn’t even realize it. Most people aren’t self-aware enough to identify in real-time when they are overconfident. However if you can detect the symptoms that show up in your trading process, that tends to be a more reliable signal. I was forgetting to leave stop losses, not protecting profits, and layering correlated trades on top of each other to fool myself into thinking I was taking less risk than I actually was. If you catch yourself feeling overconfident and complacent, remind yourself there are many other traders out there with the same view and same position, overleveraged and dangerously exposed to the next market reversal or change in regime. Act accordingly by tightening stops, reducing risk, and thinking about all the ways your view and portfolio could go wrong.

Believing I could achieve the same results with less work

Another symptom of overconfidence was letting other investing interests cannibalize my time and distract me from global macro trading. I started to spend less time consuming economic research and talking to other traders about the markets. Instead of staying at my desk preparing for a market-moving economic number, I would be out with friends or watching TV at home. I thought I could spend more time on all that other stuff and less time on global macro, but somehow continue to generate the same returns. I subscribed to an expensive market research service and fell for their analysis predicting inflation would roll back over by Q1 of 2022 (a disastrously wrong call). The bedrock of my trading process is staying one step ahead of macroeconomic fundamentals, and I foolishly outsourced it to someone else instead of doing the deep thinking required to be a successful trader. This intellectual laziness eventually had disastrous results for my pnl.

Trading is fucking hard. Don’t let anyone convince you otherwise. If you put anything less than 100% of your time and attention into it, you’ll fail. There are a lot of things you can get away with in other professions and still achieve success, like getting insufficient sleep, being emotionally unbalanced, having an unhealthy relationship with money, etc. But when it comes to trading, any of these can cripple your performance.

Other than helping fellow traders and investors, the other reason I started writing a public blog was to keep myself accountable. It’s hard to be intellectually lazy if I have to write something every week in an attempt to convince thousands of people of my view on the market. There have been times when I’ve started writing and realized that my idea simply wasn’t defensible when transferred from my brain to the blog, and was therefore a weak idea. Writing has had a direct positive effect on my performance. If I ever go through a multiple week stretch without writing, something is probably going wrong. If this ever happens, email me and tell me to get my ass back to writing!

Disclaimer:

The content of this blog is provided for informational and educational purposes only and should not be construed as professional financial advice, investment recommendations, or a solicitation to buy or sell any securities or instruments.

The author of this blog is not a registered investment advisor, financial planner, or tax professional. The information presented on this blog is based on personal research and experience, and should not be considered as personalized investment advice. Any investment or trading decisions you make based on the content of this blog are at your own risk.

Past performance is not indicative of future results. All investments carry the risk of loss, and there is no guarantee that any trade or strategy discussed in this blog will be profitable or suitable for your specific situation. The author of this blog disclaims any and all liability relating to any actions taken or not taken based on the content of this blog. The author of this blog is not responsible for any losses, damages, or liabilities that may arise from the use or misuse of the information provided.