Breakout on process, breakdown on discipline

 The past two months have been quiet on the blogging and social media front, but have been absolutely wild on the trading and personal front. Having honed a vertical spread options strategy I've been trading for a few years now, I finally came up with a combination of position size (relative to account size), hold period, etc that allowed me to in theory maintain a positive expectancy for an indefinite period of time. The only challenge now was simply executing it with ruthless discipline, which I did...and boy did we see some nice results. The two-month tally was a 124% return on capital, which is is kind of in "silly number" territory. At this rate, one can only envision world domination before long (since this was a repeatable process). The thing that made this possible was ruthless commitment to my process, coupled with a nimble but focused look at the markets to ensure proper trade selection. In many ways, this was a "breakout" in terms of my adherence to a process, made largely possible by the extrapolation of expected returns (which kept me motivated).

Now the flip side of things. Fueled by seemingly guaranteed success, and corrupted by extraneous events whose details are not relevant to this discussion, my discipline and respect for my own PnL broke down. I took on trades that were both inappropriately large in size and did not pass the smoke test I usually require. In other words, I was gambling again. Though I'm not a gambler by nature, trading can essentially transition into gambling when risk is not properly gauged nor respected. This resulted in me essentially taking a big loss that put a serious dent in my PnL.

Coming out of this loss coma, I learned two valuable lessons. One, to respect one's risk parameters no matter what one is going through (euphoria, uncertainty, need to make $, etc). They are there for a reason, something I came up with through meticulous planning. Two, that there is actually a sort of 'signature' to the precursor of gambling  - it usually involves a hazy, lazy view of the markets and of the immediate trade in front of you. We are lulled into thinking that past performance is indicative of future performance, not realizing that a certain set of criteria need to be met (like one's alertness, commitment to the process, the probability of predictability of the market, etc). In other words, we sometimes completely dismiss what it actually took to make a buck in this market, and then we set ourselves up for failure. We cannot compromise our profitable process for the psychological thrill of just trading for the sake of trading outside of that process, pivoting strategies just because, or listening to outside voices that try to sell you on "better" strategies that will "make millions". Just stick to what you do best, and what actually works - a positive edge is such a rarity to begin with, that properly recognizing and honoring it will automatically lead to patience, confidence, and loss prevention.

Trade safe people!