The Four Habits Together

Why the parts do not add

A cost that is charged on a trade adds to another cost charged on the same trade. Lesson 10’s four charges add, lesson 78’s tax comes off what is left, and the arithmetic of module 2 works because none of those charges can prevent another from being charged. A habit that changes an exit is a different kind of object. It does not take money off a trade; it replaces the trade with a different one. Two of them cannot both replace the same trade, so their costs cannot both be paid.

That is the whole of the mechanism, and it is worth stating before the table because it is the one thing in this module that a reader could have derived rather than measured. Where two rules each specify a way out, the trade ends at the first of the two, and whichever one that is, the other never happened.

The sheet, all four columns at once

Here is what each habit does to lesson 63’s seven trades, alone and then together. Every row runs the same seven entries and pays the same 0.861 in costs.

The fourth row is arithmetic and the fifth is a measurement, and they differ by 2.70 a share. The reason is one trade. Trade 2 goes 0.453 of an R under water at bar 12, which is where the quarter-R stop kills it for a loss of 0.70. But it first closes at 106.7 on bar 10, three dollars above the entry, and the take-profit leaves there. By bar 12 there is no position for the stop to close. The habit that costs 2.20 across the sheet saved 3.70 on this one trade by getting there first.

Trade 1 is the same story with the signs the other way. The stop reaches it at bar 7 for a loss of 0.50 before any close shows a profit, so on that trade the stop is the rule and the take-profit never fires. Two habits, seven trades, and on every one of them exactly one of the two decided the outcome.

The size, on top of what is left

Now add lesson 88’s sizing to the pair. The seven results are no longer lesson 63’s: they are the results of the combined exits, which finish 5 of 7 positive rather than 6, and the sizing rule keys off those. It carries an average position of 2.071 units and returns 5.816 against the 9.195 a flat position of that same average size would have returned, a ratio of 0.6326.

So the three acting habits, run together as a trader would actually run them, take a rule worth 4.16 over holding to one worth minus 1.24, and then hand back a further 36.7 per cent of what the remaining exposure earned. The fourth habit — the 3.90 that showed and left — costs nothing at all, because it is not an action. It is the reason the other three feel necessary.

What survives

Three things, and they are the module’s actual output.

The first is that the interaction runs in the trader’s favour here, and there is no rule saying it will. Two exits competing produced 4.44 where the sum predicted 1.74. Run the two in the other proportions — a wide target and a wide stop — and neither fires, and the pair costs nothing at all. The general statement is only that the costs of exit habits are bounded by the worst single one rather than by their sum, which is a much weaker and much more useful claim than either 8.10 or 5.40.

The second is that the win rate saw one of the four. It reads 6 of 7 under the rule, 6 of 7 under the early exit, 5 of 7 under both, and 4 of 7 under the stop alone, and it is completely blind to the sizing rule, which cannot change whether a trade finished positive. The number most traders check moved for the habit that cost 5.90 and stayed still for the one that cost 2.20 and for the one that cost 36.7 per cent of an exposure.

The third is the one worth taking away. Every figure on this page was produced without changing a single entry signal, a single exit signal or a single price. Almost nobody you trade against has separated the two, and separating them costs an evening, because the entries are in the statement and the rest is arithmetic on a price series you can download.

Trade 2, under all four habits at once

The rule goes long at bar 9 at 103.7. Four habits now have an opinion about what happens next.

Bar 10 closes at 106.7. This is a profit of 3.00, and it is the best close the trade will ever show, so lesson 89’s column records 3.00 here and will record 1.00 given back if the rule is left alone. The take-profit habit does not wait to find out: the first green close is a green close, and it leaves at 106.7.

Bar 11 closes at 104.6 and bar 12 at 103.0. Under the rule alone the position is still open and is now 0.70 under water, 0.453 of an R, and the quarter-R stop sits at 103.3139, so the stop fires here for a loss of 0.70. Under both habits nothing happens, because there is nothing open.

Bar 13 closes at 105.7, where the rule’s own crossover exit comes, for 2.00.

So the same trade is worth 3.00, or 2.00, or minus 0.70, and which of the three depends on nothing but which of two competing exits was reached first. The sizing habit then multiplies whichever number arrived by a position it chose from the previous trade’s result, and the memory habit files whichever number arrived beside the 3.00 that showed.

Four habits, one trade, and only one of them ever gets to act.

That is why a trader cannot debug this by feel. The four are not four independent leaks that can be found one at a time; on any given trade exactly one of them is operating, and it is a different one on the next trade. The only way to see the set is to hold the entries still and run the exits as rules, which is a spreadsheet rather than an insight.

So take your own last year, keep every entry exactly where it was, and re-run your exits as four separate rules.

What this does not settle

That these are the four habits that matter. They are four that this course’s own data could price, chosen for that reason. Overtrading, revenge sizing after a drawdown, refusing a signal after two losses and the whole family of things a trader does between signals are not on this page, because seven trades on sixty closes cannot see any of them. The module is a method with four instances, not a taxonomy.

That the interaction is favourable in general. It was favourable here by 2.70 a share and the third bound in lesson 87 is the reason to distrust that: these stops fire on closes, and a real stop firing intrabar on trade 2 would have been reached at some point during bar 11 or 12 and might well have got there before bar 10’s close in a series with intrabar prices. On a real chart the take-profit might not win that race, and the pair could cost closer to the 8.10 the addition predicts than to the 5.40 measured here.

That minus 1.24 is what a trader with these habits earns. It is what these habits do to this rule on this window, and lesson 88’s 5,040 orders are the reminder of how much of any such figure is sequence. The claim that survives is the ordering: the stop cost more than the target, the target cost more than nothing, and the sizing rule cost a share of exposure rather than a share of the result. The magnitudes belong to this sheet.

That holding the entries still is legitimate. It is the assumption every page in this module has made and it is false on a live account, for the reason lesson 87 gave: an early exit frees capital, a stop frees it sooner, and the next signal arrives against a different book. A trader who ran all four would not have taken these seven trades. Every number in this module is therefore an attribution rather than a forecast, and the honest form of the finding is that these habits cost this much on a fixed set of entries, not that they would have cost this much in a life.

And the last concession, which is the module’s and the course’s: nothing here measured a person. The eighty-five lessons before this module measured markets; the module measured four quantities, and what the four have in common is that no trader reads them. The best close is not on the statement. The excursion is not on it. The counterfactual flat position is not on it. The order the results arrived in is on it and nobody reads it that way. A trader who finishes this course with one habit should have that one: before believing a number about your own trading, ask which column it came from, and if the answer is that it came from the statement, ask what the statement does not print.