Finding an idea or a trading opportunity is a major part of a trader's workflow, but it's not the only one.
At one brokerage I worked for, the buzzword was implementation, and whilst its frequent and repeated use grated on me back then, it's exactly the right word for this article.
“Implementation is the process of putting a plan, decision, or design into effect. It is the practical execution that bridges the gap between an idea and reality”
In trading Implementation turns your research and analysis into a PnL, and ideally, a profitable one.
However, for that transition to take effect, the trader has to action it; they have to pull the trigger, and that’s not always as easy as it sounds. Because our subconscious can and does work against us.
When people say that having the right mindsight is the key to being a successful trader, they are right.
That’s because you can have the best technology, connectivity, access to capital and streams of ideas.
However, if you allow your emotional self to make the decisions, rather than the rational, logical part of your makeup, then it is highly unlikely you will succeed.
In fact, in the worst case, you may not trade at all.
Some traders fall foul of what's known as perfectionism or the “holy grail syndrome”, under which a trader is constantly on the lookout for a better or perfect trade set-up. That means they hesitate to pull the trigger on a trade because they fear making a false entry. Instead, they want everything to be perfect before they commit.
But of course, that's not how the world works.
On the flipside, the need for perfection can fuel loss aversion, where traders hang on to losing positions in the belief that they will turn around. In reality, they are unwilling to take a loss because they, or part of their brains, don't want to be proven wrong.
The tricks that your brain or psyche can play on you can directly affect your decision-making; that's why traders need to leave their ego and their emotions at the door, easier said than done, of course.
There are strategies to help you do this, strategies which are designed to remove emotional input from trading completely. They are objective, not subjective.
What am I talking about? Rules-based systems, which start with a trading plan.
Money and risk management rules are the cornerstone or foundation of your trading journey.
After all, if the foundations of a building are laid down incorrectly, it's quite likely that the building will become unstable in the future, or even collapse completely.
Don't be fooled into thinking that it’s only new or inexperienced traders that can fall into this trap, because
I am here to tell you that isn't the case.
In fact, I have experienced it myself in the last few weeks, in the US cosmetics and fragrance stock Coty Inc COTY US.
I had been watching Coty from mid-April
And as you can see in the images below its posted numerous price alerts since then, many of them being triggered during July.
Source: Darren Sinden
Source: Darren Sinden
All in the chart
If we look at the COTY chart below, we can see what looks like a hammer, a classic reversal signal, posted in late June.
That's followed (confirmed) by two solid green bullish candles that took the price higher, though Coty rejected another move higher on the third day, posting a shooting star, another reversal pattern, but this time one, which tells us that the bulls had lost control or at least had stepped away at that point. As a result, the price fell back.
However, by the 9th July, we had another green candle, and fresh upside momentum was confirmed by a bullish MA cross, with the faster-moving 10 D MA line crossing through and above the slower-moving 50D line, which I have circled in blue below.
Source: Barchart.com
Not only that, but we saw the price get above the downtrend that had been in place since early February (drawn in pink) and the upward-trending 10 D MA acting as support as the price moved higher.
Opportunity Cost
It was right to buy the stock when the hammer was confirmed by the first of the two bullish candles shown above, and there was an even clearer buying opportunity on the MA crossover and move above the downtrend line.
Why did I ignore the price alerts and bullish signals from the chart and the price action?
If I'm honest, it's probably because I am trialling my trading signals with a new institutional customer, and I want to impress them, but in fact, what's happened is that my hesitation or inability to act has meant they have missed out.
We can see the opportunity cost of not acting in the image below, which shows the price performance of Coty over the last 5 days and the last month.
Coty Price Performance
Source: Barchart.com
For comparison, here is the same data for the S&P 500 index, which, if anything, just rubs salt into the wounds.
S&P 500 Price Performance
Source: Barchart.com
All is not lost, however, because I have recognised what’s happened and why.
And I can now take steps to make sure it doesn't happen again.
This will include reinforcing my checklist of criteria, making sure I definitely run through it, and ensuring that if I come up with a score of 7 out of a possible 10 ( or above), then I will pull the trigger in future.
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