The Power of Now
Debra looked at the candle on the daily chart. It was yesterday's candle and it was red just like several before it; and it looked good. You see, it represented a pull-back from a high several days ago on the YM E-mini. The high was the latest in several higher highs and higher lows that stretched back a few months representing a strong upward trend. What looked attractive to her was the fact that the price action had bounced off a 10-period and a 15-period exponential moving average several times, and as well the highs pulled back off significant resistance levels several times. On this day, the price action's pull-back was hitting a significant support level, which also happened to be coinciding with an upward cross-over of the two moving averages at the open. For her, this was an important set-up that she had been waiting for.
Debra was an experienced trader, and she appreciated that having a trade plan was essential; she also had a plan for this trade as well...that was her method; she aimed to plan her trade and trade her plan. There was, however, a fly in the ointment...she "knew" that the price action was going up! In this instance, she had a "long" internal bias fuelled by certainty...this is not a good thing.
As she executed her limit buy order slightly above the resistance-that-had-now-become-support level by a tick, her order automatically set her hard stop four points below the entry when she was filled. Everything looked superior, that is until the price action began to breathe, dropping down one point, then two, then three and got perilously close to her stop.
However, Debra "knew" that the price action was heading up. She told herself that the set-up was perfect, and she wasn't about to let a dip in the price hit her stop, take her out and then retrace upward leaving her behind. So, she moved her stop. This was a clear violation of her rules, but she felt a little fudge was OK; after all, she was about to profit nicely when the price action finally goes up and hits her target for a gorgeous 4:1 reward. But, to her dismay, the price action continued to drop and headed straight for her stop again...and she moved her stop again. She was now fully caught up in her certainty, blinded by fear of taking a small loss, fear of being wrong and greed as she anticipated the profit.
Then she thought, "…oh what the heck, it's going to go up; look at that trend." So, she took her stop out. Just then something terrible happened; something that she had never in her wildest dreams of this trade had anticipated...the price action began to plummet like a red brick falling off a high ledge. You see, this was February 27th, 2007, when the Dow dropped 350 points in 5 minutes, and a 500 drop total for the day. She watched in horror as the long red candle bled down her chart and haemorrhaged her account. But, she was unrepentant because she still held on to the "hope" that the price would come back.
As the price approached the Average True Range she thought, "...well, it surely will retrace at the ATR, and even if it doesn't come all the way back, if I double down, I will get my money back!" But, alas, it didn't come back and the price continued to fall. She was frantic and fully frazzled by the events that were unfolding in front of her. When the pain became so acute that it wrestled her from the trance she was in, she finally liquidated her position; but not before she had lost 20% of her portfolio in one trade and in one day! Now, this story begs the questions: Was this catastrophic loss due to a lack of knowledge? No, it wasn't; Debra had experience and knew what she was doing. Was the loss due to something that couldn't be managed? No, with training and the use of emotional tools, she could have managed her situation and taken the small loss early on. And, lastly, if she had followed her rules, could she have avoided this disaster? Yes, most definitely. Debra had found herself in a negative trader trance stimulated by fear and greed, and driven by subconscious beliefs and thoughts.