Who's Cheating Who?

There is an axiom in trading that goes something like this... "If things aren't going well, did you fail the strategy, or did the strategy fail you?" In other words, if you have a bad month/week/day it's important to figure out why. April expiration was not a great month for me (said sheepishly). When that happens it's important to figure out what happened. Is it something I did? Or did I just fall prey to the law of averages. When things don't go well, whether in a specific trade, or in a broader strategy, the reason usually falls in one of three areas:

• The rules failed me: Traders spend a lot of time developing trading rules, but many times we just don't get it right. There are times that the rules need to be tweaked or modified to take into account changing times, or situations we didn't account for.
• I failed the rules: This is far more common. This is the situation where the trading rules are just fine, but I didn't follow them. It's no surprise that poor discipline charges a hefty toll.
• It just happened: Sometimes the rules are just fine, we follow them perfectly, and we still lose. That's the law of averages at work. For example, when I trade iron condors I know going in that I will lose 2-3 months per year. That's just the way my strategy works out over time.

When we encounter a loss, or a losing period, the next question is "Why?" Which of the three areas above is responsible for the loss? Did I cheat the rules, or did they cheat me? The only way to know for sure is to spend some time in honest evaluation. Personally, I find the quickest way to do this is to Replay the Trade. I go into one of my backtesting tools and replay the trade exactly according to the rules. If the result is different then I know I failed the rules.

So what happened last month? I spent a lot of time evaluating this question. Every trader should keep good logs of every trade. I reviewed the losing trades and replayed them according to my rules. The result? It was actually two things. I believe that my rules are just fine; but items 2 and 3 above bit me. I actually have a couple of different strategies, and with the volatile "v" shaped price action this was just destined to be a losing month no matter what strategy I used. On the other hand, if I had followed the rules exactly I would have lost less than I did. This isn't good, but it's probably not uncommon. I think (at least for me) that it's much harder to be disciplined when I'm in the middle of a loser. Things are going much better this month, and I'm being much more exacting about things... go figure.

Good Trading...