“Coulda, woulda, shoulda” – a mindset that is NOT conducive to successful market speculation

“Coulda, woulda, shoulda” – a mindset that is NOT conducive to successful market speculation.

As a discretionary trader (who is also introspective), seldom do I have the feeling that I made a perfect trade. In almost all cases I can find a fault with some aspect of my trades (analysis, entry, sizing, exit).

As traders, we do not have the luxury of spending too much energy to second-guess trades. We step to the line, place our bets, then live with the outcomes. If we pick up on a repeatable pattern of things that can improve our net, long-term outcomes, then we can consider changes to our trading protocol.

I am a rules-based trader (with a small amount of wiggle room on the exit side of trades). If one of my rules is terribly flawed, then it is up to me to make a fix and apply it to all subsequent trades. But second-guessing my rules based on the last trade or small series of trades is not something I should do.

Amazon (AMZN) stopped me out on Friday for a loss of 135 basis points. Ugh! The initially planned risk on the trade was 60 basis points (6/10th of 1% of total nominal trading capital). I lost 1.35% of my total nominal capital on the trade. This is my worst single trade in several years. In fact, I cannot remember when I last had a comparable loss. The worst loss in recent memory can produce a lot of “coulda, woulda, shouldas.”

• Should I have been in the trade in the first place?
• Could I have exited some or all of my position prior to the earnings report?
• Should I carry stock positions into earnings reports?
• Would I have been better off removing my stop to avoid selling out my position near the lows?In answering these questions, I must address my trading rules and place the AMZN trade in context.

• The rectangle on the weekly chart was as quality a pattern as I have seen this year.
• My rule is to exit trades in which I am carrying a loss prior to the earnings report. I did not have a losson Thursday’s close (although I also did not have a comfortable profit cushion).

  In hindsight, I might have covered half my position on Thursday. But what if I had covered my position, the earnings report had been wildly bullish, and AMZN had gapped up $250 per share on Friday? What then? Would this scenario also have been subject to a “could, woulda, shoulda” appraisal? As a professional trader, I need to wear my “big boy” pants and accept things as they happen.

  If I now make a trading rule dealing with earnings reports, what exactly should the rule be? And, what would have been the outcome of that rule during my entire trading career?

  “Coulda, woulda shoulda” thinking opens pandora’s box. I would not do anything different with the AMZN trade if I had to do it all over again.

  However, had I risked 100 BPs, 200 BPs, 300 BPs or more on the trade, then I would need to have a serious conversation with myself.

  Bottom line: A 135 BP loss is not fun (it is 1/3rd of what I anticipate my worst DD will be each year). But a larger than expected loss in and of itself is not reason for panic or for abandoning a trading practice. Had I lost 5% or more of my capital on the AMZN trade, then the problem would have been with my sizing, not with the market’s reaction to AMZN’s earnings report. Successful trading is more about survival than about being right.

Excerpt from Thoughts on a Weekend Afternoon, August 1, 2021, page 1