Every now and then in my trading, I do something really dumb. Something so dumb it literally makes me wonder what on earth I’ve learned these last three years.
On these thankfully rare (but not rare enough) occasions, my method goes out the window and the usually-repressed-but-very-impulsive ‘thrill-seeking’ part of my personality takes over.
The trouble with this is that by definition, thrill-seeking has an element of danger to it. For me, it involves crazy impulsiveness, unnecessary risk taking and some sort of obsessive attraction to my ‘naughty’ trade.
These rogue anti-plan trades are dangerous for a number of reasons.
The first is obviously the blatant lack of discipline displayed by the fact that I took the trade in the first place.
But even more dangerous than that is the multitude of psychological triggers that prompted me to that point. If I don’t cut through and analyse my motives in the trade, you can bet your bottom dollar that more of these trades will follow.
That said, whatever reasons I give for straying from my plan does not detract from the fact I have discarded my highly esteemed status of ‘Trader’ and entered the realm of the gambler.
I really do need a good smack.
And thankfully, quite often the markets will deliver a very timely spanking to teach me a much-needed lesson.
But sometimes, these trades don’t punish you like you deserve. Instead, they shoot for the sky with never a backward glance and you’re left feeling pretty damned clever, surrounded by your ill-gotten gains.
This is really the very worst outcome. It’s dirty money.
This is the real danger in the ‘naughty’ trade. You get positive feedback, and rather than thinking “well, that’s just darned lucky!” we tend to take all the credit for ourselves. We get the message that stupidity pays. And then it’s much, much easier to be stupid again.
So what to do?
There are some ways to salvage a dirty money situation.
- The first thing to do is determine if your risk is in order. If it’s not, get out. Immediately.
- If your risk is inside your parameters, make a set plan to deal with this rogue trade. Depending how far you’ve strayed from your plan, you might be able to manage the trade in the normal manner, but if not, write a unique mini-plan for just this one trade. Write it down, and follow it.
- Make sure you get no positive feedback from the trade, other than the lessons you can learn from it. This sounds harsh, but I believe this should include any profits you take. Give them to charity – someone can benefit from your lack of discipline, but it shouldn’t be you.
- Most importantly, pull every tiny detail out of the trade, cut it into tiny pieces and analyse it. And not just the trade itself, but your part in it, as Trader. Note what you did wrong, why you did it, how you got the trade back on track (regardless of the outcome) and what you did right during the trade management. Write this in your Rogue Trade Book, and keep it forever.
“Every time I found the reason for … another mistake, I added a brand-new “Don’t!” to my schedule of assets.” Jesse Livermore.