The Dreaded Ebb!

“I made $11,000 in two weeks, starting with $2000! But now, I have given it all back and more!!??” So said Angel when she was explaining why she was so depressed.

Today we are dealing with the issue: why don’t traders do what they know?

In asking the question, I assume that a trader knows:

• He needs a written trading plan.
• He needs a written risk management/position sizing plan.
• He needs to execute his written plans consistently.
• He needs to keep written equity and written psychological journals.

Angel knew all of the above; the problem was she did not do what she knew!

In this section, I’ll be looking at the reasons for this behaviour and what we can do about it.

There are two main hurdles to consistent execution:

The nature of the markets: on a trade-by-trade basis its randomness and unpredictability.

1. Our hard-wiring, especially our desire for certainty of outcome, and
2. Our need to stay in our comfort zone.

The two barriers act in concert to provide a very high block to successful trading. The problem with market randomness is its ability to confuse us. It would be great if knowledge were consistently rewarded and ignorance punished. But that’s not the way the market operates.

Regular readers of my blog will know that I see the market as having three phases:

• The flow – where no matter what we do, we lose money.
• The ebb – where everything we do makes money.
• The normal – where profits and losses are distributed according to our plan’s expectancy results.

Angel’s problem? She encountered a flow stage in the first two weeks and believed the results were due to skill rather than luck. This failure meant she was unable to stop the rot once she encountered the ebb stage.

The reality is as traders, we live in the shadow of the ebb. I’m not talking about the normal run-of-the-mill losses. I’m talking about a sustained, morale-sapping run of outs! It’s our job as traders to minimise the losses in this phase so that when it ends, we don’t have to chase our tails.

I am presently in ebb. I know that because my quantitative and qualitative benchmarks tell me so. For example, my win rate for January is around 31% (5 wins from 16 trades) My average win rate is 52.13%. Whenever a win rate drops below 38%, I assume I am in ebb.

But here’s the key: notwithstanding the win rate, my percentage return for the month is still above 1%. If I can keep the ROI positive for the duration of ebb, then I shall be able to return a better than average ROI during a normal or flow phase.

By the way, the trades and results are freely available for review at the Psyquation site. To gain access, please register at

https://barrometrics.lpages.co/psyquation/

Then, follow the instructions carefully. Note that to gain access to my results, you must have a Psyquation account. Follow the instructions and you will be fine.

Next time I’ll look at what we need to do to execute what we know – in short how do maintain our discipline.

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