The Cost of Second Guessing Strategies

Last Updated on November 17, 2020 by Oddmund Groette

I keep a detailed log of all my trading activities, both day trading, swing trading and long-term positions. I believe this is the only way I can improve my trading. However, doing all this “extra” work is not exactly the most interesting job on this planet, but I believe by far the most important I can do to improve my results. The more parameters I put in the more interesting testing I can do some months later! Doing the records might be boring, but I take great pleasure in drinking coffee and eating cheesecake while studying my trade records.  I can clearly see where I go wrong.

One of the things I do is to record P/L throughout the day, even if I have already realized the position, to improve my exits. To be specific, I record P/L at 6 different time intervals before close. I later check the results against some other parameters.

Based on all the parameters I use I can track every trade pretty well and make all my trading as mechanical as possible. I’m not very good at discretionary trading, hence I try to do it completely mechanical. But far too often I second guess my strategies. Unfortunately, all my second-guessing deteriorates my P/L. My decisions to overrun my strategies do not create any value whatsoever.

Why do I second guess (my quite good strategies)? Because it’s very hard to detach from money when having a really bad day or good day. On bad days I start hoping for the better, and on good days I’m afraid of giving away money. Completely irrational, and I know it. But still very hard to put emotions completely on the sidelines.

Because I keep records I can calculate quite exactly how much my second-guessing is costing me. Below is a chart showing my accumulated profits since October 2015:

The pink line shows the completely mechanical results, while the blue line is my actual trading. The difference is huge, both relatively and money-wise. So to refrain me from more second-guessing I have made a big poster on my wall showing all my five rules. Yes, five simple rules. Also, instead of sitting in front of the computer, I’m better off walking the dog, going to the pub or chasing girls. The more I stare at the screen, the more stupid mistakes I make!

On a side note: My day trading has not been very good over the last two years. One reason is that I’m being forced to trade less because of new non-display fees from NYSE (I only trade Nasdaq stocks now), and the second reason I’m focusing more on long-term positions. Long-term positions give me more peace of mind because it involves fewer decisions.