The Wagner Weekly
January 27, 2002

Assessing Your Trades

When I began my career as a trader years ago, I used to spend hours analyzing each trade, and I still do to this day. However, there is one crucial difference that has changed over the years regarding the way I used to analyze my trades versus how I do it now and that change has had an incredible impact on my profitability. That difference was the manner in which I measured the success (or lack of success) in each trade.

As a new trader, I was always under the assumption that the way to determine whether a trade was successful or not was based simply on whether or not the trade was profitable. If a trade netted me a profit, I assumed I did a good job and made a good trade. Conversely, I automatically equated losing trades to being bad trades that I probably should not have entered. While this simple methodology seemed logical, I soon learned that my method of analyzing my trades was highly flawed and was actually the opposite approach of the mentality that is necessary for long-term success as a trader.

What I eventually learned was that my trades needed to be evaluated based on whether or not I made the right decision and stuck to my trading plan rather than whether or not the trade resulted in profits. I learned that if I focused my efforts on simply making the right decisions rather than making a profit on each trade, the profits would automatically come over the long term. I realized that the problem with judging trades based purely on profitability was that the occasions when I accidentally profited from poor trading decisions or lack of discipline reinforced bad habits that eventually caused me to make poor trading decisions.

In order to achieve and maintain long-term success as a trader, it is crucial that you have the discipline to stick to you personal trading plan every day of the year. Obviously, this means that you need to have a written plan to begin with, but that is an entirely different lesson that we will discuss some other time. Although it is sometimes challenging to know whether you are truly sticking to your trading plan when in the heat of battle during the trading day, there is one very important question you can get in the habit of asking yourself that is an excellent, effective way to determine whether or not you made the right decision. That question is as follows. . . "Would I do the same thing again, knowing what I now know?". In other words, after seeing the results of the trade, whether it worked out or not, would you make the same trade again without changing a thing?

If the answer to that question above is an unequivocal "YES," you made the right decision and should feel good about the trade whether it actually resulted in profits or not. Of course, this question only works if you are truly honest with yourself and are able to see past your own ego. Although you are obviously going to have losing trades even when you did everything right and stuck to the plan, you will be profitable over the long-term if you never stray from your plan and always focus on making the proper decisions.

Rather than showing you a profitable example of a trade Morpheus recently made, we are showing you a losing trade because you will see how asking this question applies. Below is an annotated chart of an actual trade that Morpheus Trading Group made about a week ago. It is a daily chart of RTH (Retail HOLDRS) and was intended to be a multi-day "swing" trade when we bought it. However, the trade did not work and we were stopped out for a loss. Upon analyzing the trade based on the question above, we felt good about getting stopped out because we realized that we did everything right and would do it the same way all over again. Here is the chart:



We were long RTH above the trendline in the high $71 price range. When we entered the trade, we set our stop below both the trendline support and the 20-day moving average, which was just below $70. Our assumption was that RTH would come down to the trendline, bounce off of it and continue higher. However, not only did RTH break the trendline, it also broke the 20-day moving average near $70. When this happened, we stuck to our plan and took the stop, realizing a loss on the trade. This turned out to be a great move because RTH dropped nearly 5 more points before bouncing. Upon analyzing the trade, we looked back at the chart and net result of the trade (which was a loss) and asked ourselves, "Would we do the same thing again, knowing what we now know?" Despite getting stopped out, the answer was "Yes" because we had a solid reason for entering the trade, our stop was in the right place, and we were disciplined by taking the loss. Conversely, if the trade would have broken below the 20-day moving average and we did not cut the loss, the answer to the question would have been "no" because we would not have been sticking to our plan. It also would have been bad if we stayed in RTH after breaking well below the 20-day MA, even if it reversed back up and made us a profit. As I mentioned earlier, making profits from an incorrect trading decision or lack of decision is never a good thing because of the bad habits it reinforces.

One final thought for you. . .If you are having a difficult time profiting under the choppy and indecisive market conditions we have been experiencing lately, don't get discouraged. I like to think of current trading environment as a weightlifter trying to become muscular and buff. As he is doing all the hard work, pumping iron, it is very difficult and results are not immediately seen. In fact, he may even become discouraged if results are not immediately seen. However, once the muscles are finally built up, he will be in top form and it takes much less effort to keep the muscles toned. Think of the current trading conditions as building muscles. If you can survive this period by keeping losses small, you will have your muscles developed by the time things improve (and they eventually will). If you work hard at building a sold, disciplined plan now when things are not so easy, you will be on top of your game when the smooth trends return. Rather than getting discouraged, embrace this environment as a chance to build muscles to become an excellent trader down the road. Make capital preservation your number one goal right now so that you will be around to capitalize on better times as a much stronger trader. Remember to ask yourself that all-important question, "Knowing what I now know, would I do the same thing again?" As long as the answer is yes, feel good about your trade results knowing that you will be profitable in the long run as long as you stick to your trading plan and don't worry about the day-to-day profit and loss results.

Weekly Reality Report

Below is a summary of the performance of each MTG trade that was closed during the week of January 20 - 24 2003. Any open positions are not reported until the week they are closed.

Trades from The Wagner Daily:

Trades from the ETF Real-Time Room:

Click here for a detailed explanation of how Morpheus Trading Group calculates and reports its trading results.

Click here to view a detailed cumulative summary of every MTG trade since the end of October, 2002 (updated weekly).

Odds and Ends

 Look for a strategy article on ETF Trading that I (Deron Wagner) wrote for the March issue of Active Trader magazine; it will hit news stands this weekend. I also will be presenting an educational workshop on exchange traded funds at the International Online Trading Expo. in New York City on February 27, 2003. There is a discount for those who register early for the workshop. You can view details by clicking here. We hope to see you there!

Morpheus has completely revamped their web site, so be sure to take a look if you have not visited it lately! A new "education" section has been added which has links to MTG articles such as Trailing Stops, Trading the Gap, etc. Archives have also been updated to include all back issues of The Wagner Daily as well as the weekly newsletter, so check out what you're missing if you're not a subscriber to The Wagner Daily. Free trials to all MTG services are available by clicking here.

As always, thanks for spreading the word about Morpheus Trading Group and all the benefits of ETF trading!

Deron M. Wagner
Founder and Editor

Morpheus Trading Group
www.morpheustrading.com
The Leader in ETF Trading!

DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Weekly ( hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may buy, sell or have a position in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.
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