At The Close: Making A Sacrificial Trade by John Chapman
It’s startling how such a concept can help you overcome the most destructive emotional impulses of trading.
AS a longtime professional trader, I don’t know how many times I have implored the trading gods to get me out of dicey positions with my dignity intact. In the course of these futile communications, I have learned a thing or two. For one, those higher powers are big-picture types; the minutia of accounting is of little interest to them.
This turned out to be a valuable insight. I have also learned how the trading gods inflict pain: they favor not only direct losses but also to add insult to injury. To appreciate this, you only have to think back to how many times a stock has soared right after you sold out at a big loss.
In my early days as a trader, I found myself on the receiving end of all too many humiliating losses. How could I placate those powerful beings? I finally came to the answer: animal sacrifice!
Well, sort of. Say I was long five lots of sugar and was getting pulverized. I would sell one lot — the “sacrificial lamb,” so to speak — and then announce, “I can’t take it anymore!” This is where knowledge of the gods’ disdain for detailed accounting pays off; they often miss the fact that I only partially liquidated my position. After my exclamation, almost as if on cue, the market would turn around and zoom back up, just the way it did when I used to bail out of my entire losing position. This time, though, I can sell out my remaining four lots at a much higher level!
As ludicrous as this all sounds, there is considerable merit to viewing sacrificial trading as a tool. Much of trading involves a battle to maintain discipline under stressful conditions. This struggle becomes most intense when you must decide whether to bail out of a losing position. Your emotions make you want to get out of the position or find some rationalization for staying in, thereby keeping hope — the destroyer of many a trading career — alive. Freeing yourself from the influences of these strong emotions is essential at such critical points if you are to make rational decisions.