Thursday, October 05, 2006

When your System Fails You

What do you do when your system fails you? The question is an important one for traders and is one that most likely we all have asked ourselves at some point in our trading careers. This question demands another question, and that is, for how long has your system failed you and for how long was it successful before that? For one day, one week, for six months? Today was the worst day our service has encountered thus far in its short existence of five months. We had three stocks trigger today and all three failed. Now as much as we hate getting spanked by the mother market, and even worse, causing losses for our readers, we are not worried nor depressed.

No trading system functions every day, in every type of market. We are break-out, momentum traders who use a system with a very tight stop (1%): in choppy markets we will get hit. This has always been the case and always will be. Today was the first day within our service that we had 3 triggers and 3 losses but it will most likely not be the last. All 3 stocks triggered, all reversed with the market to hit the stop loss, and then all 3 reversed yet again and at one time or another went above our alert prices. It's a perfect example of what happens in a choppy market.

What do we do? We pull back, regroup, become more cautious, and ultimately sit things out until things improve.

Now, if our trading system were brand-new to us then we might be concerned, but the years of successful experience that we carry with us give us confidence, faith, and vision. The current trading environment (which alternatively might be great for other types of traders) that is very challenging for us, will also pass. One thing we have learnt over the years is to always have perspective and take the bad, and the good, in stride.