Are Your Tracking Your Mistakes? by Kevin J. Davey

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Are Your Tracking Your Mistakes?

by Kevin J. Davey

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This is a photo of a gallon of milk. Normally around $3 a gallon, this one cost me a whopping $2350.
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Well not exactly, but when I look at milk these days, that is all I see. And it is all due to a trading mistake.

Let me explain.

Right now, I trade around 80 different strategies, in all types of futures markets. Many of my strategies are automated, so I only need to check on their status a few times a day.

A few of the strategies, though, require me to enter positions manually. These are either calendar spread trades, options trades or low volume futures markets (like Milk futures). Markets like these usually require limit orders— market orders will have too much slippage. So, manual order entry is sometimes the best approach. Cue the ominous music…

Of course, manual order entry depends on a human (me!) to place the correct order, at the correct time. And of course, I get distracted, try to multi-task too much, and basically screw up on occasion. We probably all fall victim to mistakes like this.

So, with the milk trade, I misread my signal, and went short when I should have gone long. By the time I realized it, I lost money from being short in an up market, and plus I didn’t participate on the long side when I should have (the dreaded double whammy!). Total cost of this misstep: $2350, and a lot of fist pounding on my desk.

This trade drove home the fact once again that trading mistakes usually cost capital, both emotionally and financially.

Over time, I’ve learned that 100% perfect trading is impossible. But, it is still the goal to aim for. Here is what I do:

I keep a log of every mistake that happens. An example is shown below. I categorize the mistake, and record pertinent details about it, most importantly the amount the mistake cost me. Sometimes, a mistake will make me money, so that gets counted in the results, too.

I define a mistake as a difference between what my strategy platform records, and what my live account says. Mistakes could be from manual operations (bad order entry, missed exits, etc), automated operations (maybe the Internet connection goes down), or anything else that should not have happened. Late on following your signal? That’s a mistake. Overruling your system? That’s a mistake, too.

Every few months, I look at the mistake list, and try to determine corrective actions to eliminate the root cause of the mistake (my old experience as a Quality Assurance leader for an aerospace company kicking in). I ask myself “this type of mistake cost me $xxx in the past 6 months – how can I eliminate it?”

If I can correct a habitual mistake, and save money by doing so, I’ll implement a fix. Note that I have to save money with the fix. Hiring a midnight to 8 AM person to monitor positions and make necessary trade corrections might be one way to eliminate overnight related mistakes, but since it is not cost effective, I probably won’t bother.

When I review, I make sure that fixes actually worked as intended. It is amazing how the “law of unintended consequences” comes into play here: you have to be careful to not create a new mistake possibility by eliminating the old one!
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This sounds simplistic, and is really just common sense, but do you do it? Could you tell me how much money mistakes have cost you in the past year? I know I can (right around 5 figures in mistakes – ugh!). My guess is you make mistakes, and they cost you money, too. Eliminating them might boost your ROI by a bunch.

Now, I keep a photo of this $2,350 gallon of milk close by. It reminds me that trading mistakes can be costly. It is certainly a good lesson to remember, over and over. It also sometimes reminds me to go to the store to buy more milk, which I am going to do right now…

About the Author: Kevin J. Davey is a professional trader and a top-performing systems developer. He is the author of “Building Winning Algorithmic Trading Systems – A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading” (Wiley, 2014), recently awarded “Trading Book Of The Year” by TraderPlanet.com. An aerospace engineer and MBA by background, Davey has been an independent trader for over 25 years. He can be reached at his website: [You must be registered and logged in to see this link.]

Are Your Tracking Your Mistakes? by Kevin J. Davey

Are Your Tracking Your Mistakes? by Kevin J. Davey

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