From the February 01, 2012 issue of Futures Magazine • Subscribe!

Managing trading errors

What is and isn’t an error

This is probably a good time to discuss what constitutes an error. If you were the trader in the previous example and you were looking to cover your short at 1255 in the March contract (SPH) but didn’t pull the trigger and instead the SPH rallied to 1256 and you got out there, you didn’t make an error — you made a trading mistake. Mistakes are also a question of a lack of self-discipline. Good traders log their mistakes and study them, but mistakes are not errors. Errors best can be defined as the discrepancy between intent and execution. Conversely, if you intended to buy 10 SPH at 1255 but instead bought 10 June (SPM), you made an error.

What are the most common types of errors? Every order, whether transmitted to a broker or self-executed, is a call to action (buy or sell) of a certain type (market order, price order, stop, etc.) that might contain the name of instrument, a price and an expiration month. Any of these can be entered incorrectly.

The most dangerous can be a buy vs. sell or vice-versa. If you tried to cover those same short 10 SPH from 1260, but if instead of buying 10 at 1255 you sold 10 at 1255, you are now short 20 contracts. If it rallies to 1256 and you buy 20, you have trimmed your profits by 40%. Instead of a $12,500 profit by buying at 1255, you have covered your short at 1256 which is only a $10,000 winner (see “The cost of trading”). Plus, you have to subtract the $2,500 you lost by selling 10 SPH at 1255 and covering at 1256. Now you only have $7,500, which is only 60% of $12,500. The important thing to remember about buy vs. sell errors is that if you accidently sold 10, you now have to buy 20 — do double the opposite of whatever you did wrong. This is a common question on broker tests.

If you enter a price incorrectly and an order that, by intent, should not have been filled was filled, you can cover the trade and put it in your error account and then re-enter the order with the correct price for your trading account. The same would apply for a stop order that was not intended to be set off. If an order should have been filled and wasn’t because of incorrect information, you have to make the decision as to whether or not it’s worth it to jump back in. Un-canceled orders also can come back to haunt you. If you cover a long position by selling for a profit, you might see that profit vanish if you forget to cancel your sell stop and get touched off on the low of the day. Most front-end systems offer multiple alerts to prevent these types of errors so you should take advantage of them. Again, if an order is unintentionally executed, the best thing to do is to just get out fast. Typically you will lose only a tick, but if you try and scratch it or work the error, you can have a small problem turn into a big one.

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