Volume 5
learning from mistakes


I hope you had some real Happy Holidays! Here is some truth: I really appreciate each reader, and I’m glad you are here. So, today we are going to examine a losing lightning scalp I recently made and what there is to learn from it (for my definition of lightning scalp, see volume 2). One of the few things I know for sure about learning is that mistakes are our best trading teachers. L is for Learning. You will remember them…you should remember them. In fact, when it comes to the ones that really charge you tuition, you likely will be unable to forget them. Losing trades are necessary. In fact, losing is an elemental form of the win/loss ratio. If anyone tells you they have no losing trades, they are not being truthful. So, let’s pay homage to the Altar of Loss…it deserves our respect.

And something new: this volume features a homework assignment that I want you to turn in to me via my Twitter account!

In addition to teaching market basics at BlackBoxStocks, I have spent close to the past twenty years teaching people things that are iterative and recursive. That just means that it takes repeated significant effort to improve upon them. One must learn a thing, do it badly, learn some more things, refine the action, and repeat. Then, they will improve. I have taught writing and guitar for a long time, and both skills are like trading. You cannot hear a bunch of guitarists and be a better guitarist. You can’t read a ton of Cormac McCarthy novels and be an amazing writer, and you cannot read a ton of trading books and be a better trader. You must actually trade, with your actual money and your psychology and real stress on the line. They you must get up when you fail, over and over and over. You have to plan trades, make trades, lose trades, reflect upon those losses, and refine. Then you have to repeat. That is exactly why keeping your position sizes appropriately small is paramount to pushing through to the point where trading begins to seem clearer to you. Eventually, it becomes easier…but it is not without this punishing effort described above.

Failing is a part of the process that can’t be replaced. You must make mistakes and learn from those mistakes. It’s called iterative learning, and it is at the very core of my approach to education. So, don’t worry about losing trades. Plan for them with appropriate position sizing (I know…broken record). But, if you incur small losses while you learn a new style of trading…or trading in the first place…you will not be run out of the game by said losses.

Now, bearded professor ranting over…to the charts!

The losing trade to be analyzed today was a Visa ($V) put. It was planned as a lightning scalp using an ORB15 break as entry. There are two very common approaches on ORB entries. Some people simply buy on the initial break. If the break occurs with volume, this is a better situation. Another approach is to wait for a retest and buy post-retest, again, hopefully with volume candles informing and fueling the trade. Here is a great Trade Talk Media video that teaches the Opening Range Breakout. Let’s turn to Image C:

I entered this trade on the ORB15 break without waiting for retest. There was not significant volume on the break…so, class, who can tell me my first mistake? That’s right. I was impatient. I have rules against trading if I feel impatient…I am well aware of this rule, mind you. However, I still sometimes break that rule. Sometimes my mind cannot be controlled. So, you see the immediate move in the wrong direction (remember this is a put trade…I want it to go down). However, my exit plan was not triggered. To review, I would exit this trade after two candles open-and-close above the ORB put trigger. No exit trigger, so I continued down the road.

Look at the first green candle to close above the red line. Alternating candles followed with the price action bouncing around the same area. As this went on for a few minutes, I felt as if I was close to taking the L. Remember, this was entered into as a lightning scalp. Scalp positions tend to be larger than other trade positions, so exit discipline is crucial. In fact, just stick to one or two contracts until you have that discipline. It can take some people many months to get there.

If you enter a trade intending to scalp, don’t alter its nature based if the play goes against you. Only hopium can transform a losing scalp into a swing…and hopium kills. Don’t do it. If the trade…as you planned it before entering…goes against you, exit according to your rules. This is The Way.

Alas, you see the two candle open-and-close trigger at the beginning of the 14th candle. I closed the trade at a loss. This was a small, easily absorbable loss so it carried no true psychological pain. Sure, no one likes to lose, but my exit plan worked. The trade was exited cleanly based on a concise plan and losses were acceptable.

Two questions: 1) why was this outcome somewhat predictable upon my entry and 2) why do I consider this small losing trade a valuable step in my trading education?

For question one, recall my statement that buying into an ORB entry on the break (instead of waiting for retest) is best served by accompanying volume. And yes…that’s right…I said there was not overwhelming volume at this entry, and I was impatient. As a result, I lost money. This was a lesson for me to respect and to remember. I will do both.

Secondly, this was a successful trade (as all losing trades are) in the sense that it furthered my trading skills. Among things I gained from carrying out this losing scalp include 1) I was able to practice my exit discipline. 2) I was able to feel the psychological torrents that accompany failure in the markets. This is a tough, and ever present, challenge to all traders at all levels of experience. You will incur losses as you trade. Use position sizes and exit criteria / stop losses that are absorbable…don’t let losing trades be big enough…painful enough…to take you out of this game. You can do it these skills can be developed. 3) It provided me with even more data that supports my rule of only buying the break on volume. If volume isn’t there, wait for retest. It also reinforced my “do not trade if feeling impatient” rule.

And now let’s examine what happened further down the road. In image D, you see the entry and exit at the shaded ovals. Observe the shaded rectangle:

This is the dreaded land of Should-Woulda. We need to talk about this land. It’s a bad place. Nothing grows in its poisoned soil save self-hatred. Remember, I was in at the first oval and out at the second. Then the mighty 34 EMA ultimately held and the price action continued downward to a new LOD (low of day). If I would had simply held, this trade would have been profitable. This last statement, though technically true, is illogical in the context of trade planning. Let’s go deeper.

I sold at a loss, and whoever bought those puts probably went on to make a nice small green. Though it might seem odd, the truth is that this no longer bothers me in the least. And I want to encourage you not to feel regret, anger, or self-doubt if you tend to take a loss and then revisit your trades and feel woe if you “left money on the table” or “exited too early.” Focus on this instead: if you follow a clearly defined exit criteria, you have done the right thing. Sure, this trade just so happened to profit. But the specific parameters of the trade plan (a very short-term lightning scalp) did not include eight bars opening and closing above the put trigger. So, I would not say “If I would had simply held, this trade would have been profitable.” A more useful, trade plan centered takeaway is “if I would have waited for re-test and that second entry at 10:27, I would have had a larger range for profit.” That is The Way.

Stick to your plan. You do not have a crystal ball or any ability to see the future. For my lightning scalp plan, my win rate is between 75 and 80 percent. This is one of the losers, and that is fine. In fact, that is the way things are supposed to be...it is the natural order. Work on your plan, refine your entries and exits, and then when something is working stick to it. It’s like those articles you see that say things like “if you had bought Amazon ten years ago at X, you’d have…” That is pointless nonsense. And if you have wings, you could fly.

Avoid that noise stalk your plan and refine it. Learn from your mistakes let them tell you what you need to do…and what you need to never do again.

So, here is that homework. Take some time to revisit and analyze a recent losing trade you made. Go back to the chart for that day, look at your entry and exit, think about how you felt during it. Really take a moment to reflect. Then then do this…here is the assignment:

Try to identify three things that this loss taught you. They don’t have to be huge lessons…but what are three concrete things you learned from planning, placing, managing, and closing out that trade at a loss? Be reflective. That trade is one of your teachers what were its three lessons?

Then, if you’re up for it, go to my Twitter post that begins “New Column up: WITH HOMEWORK.” Read that post and then let me know what your recent loss taught you. I respond to all comments, so let’s talk about it there. Your observations can help other people. We are not as dissimilar as some might think.

We learn from our losses, and we all learn together. Keep those position sizes small until you have really got it down, and thanks for reading.

Class dismissed…don’t forget that homework.

Follow River on Twitter @greatRvr