I have just watched Steven Seagal in ‘Out For a Kill’. Don’t ask me why; please just accept that some actions cannot be explained. The movie reviews say it is a terrible film with poor direction, a bad script and even worse acting, and the reviews are right on all counts. However, Mr Seagal does impart some sage trading wisdom when when he quotes an ancient Chinese proverb on the subject of revenge:
‘Before you set out on revenge, you first dig two graves’.
If you’re not making mistakes, then you’re not doing anything. I’m positive that a doer makes mistakes.
–John Wooden
We had our first losing day in quite awhile last Wednesday. And that’s not to say that we are loss free intraday everyday…quite the contrary in fact. We take intraday risk management losses almost daily. However, we do not often suffer overall losses for the day. Wednesday was an exception.
The loss was related to trying to force the market to give us our Daily Goal when it was not being offered. The loss was within our risk parameters, so it was not a big deal…except it was a big deal. We were annoyed. We were angry. We wanted revenge. Worse, we were up on the day only to gave it all back and then some. Worse still, the loss was due solely to a trading mistake we made as we approached the end of the day. A MENTAL mistake. Worst of all? We KNEW it was not prudent when we were doing it. (more…)
Successful traders do not allow negative emotions to affect their decision-making. Trading is a stressful process, and you will experience many setbacks. Expect them, however, and don’t see losses as indications that you will never succeed. Instead, be prepared to identify your negative reactions and act on them in positive ways.
Successful traders turn fear into gain. They realize that losses are a part of their business, and they expect them. But while they know that some trades will cost them money, they let those same trades become a gain in knowledge. Remember that each time you have a loss, this gives you some guidelines on how to alter your strategy. Perhaps your stop loss needs to be set higher, perhaps you need to alter how you identify trends, or perhaps you need to use new indicators.
The key point is to remember to turn fear of loss into anticipation of learning. Otherwise, your fear can cause you to forget to ask why that trade was unsuccessful and, in the worst cases, to unwisely overtrade to try to compensate for your loss.
Along similar lines, successful traders do not blame anyone or anything for their losses. They accept their setbacks and refuse to dwell on them. Instead, they learn from their mistakes and move on with their trading. Focusing on blame can cause you to feel insecure and lead you to make unwise trades to compensate for your losses. Or you may feel a desire for revenge against some non-existent enemy that “caused” your loss. Both of these emotions will distract you from your real goal of understanding how to revise your strategy based on what you learned from this trade.
Over trading is one of the biggest causes why traders never make it in the financial markets. With a click of a button, a trader can place a trade anytime he wants. It takes tremendous discipline to hold yourself back from over trading. There are many reasons why one may choose to over trade.
1. Traders without a plan
Traders without a plan are my favorite type of traders because they will always lose. Without a plan, how would one know when to take a trade and when not to? Having a trading plan is a necessity. I can not trade if I do not have a plan for the day. I feel lost without one.
2. Revenge trading
Many new traders become tilted after a loss or a string of losses. This causes them to revenge trade just to break even. This often leads to reckless trading forcing a trade when opportunity is low.
3. Chasing the markets
Alot of new traders feel more pain when they have missed a move than an actual loss. This is why new traders love to chase the markets. If price has moved away from your projected entry point, let it go. There are plenty of more opportunities. Chasing is one of the worst habits a trader can have. Not only does it offer you low rewards, it also gives you a horrible entry and alters your stop loss placement. Always think about the risk before the profits.
When you have a plan to follow, it is easy to filter out bad trades from good one. This keeps you discipline and selective in your trades. I personally do not like trading more than 5 round trips a day. Patience is a virtue. There are always good high probability trading opportunities everyday. Just sit tight and don’t jump the gun.
One way to control a loss is by reducing your size. The problem with gamblers is that they will often double up their stake so they can get even quicker. This usually leads to a greater loss and devastation. Having the strength to grind your way back from a loss is important in trading. Whenever I am having a losing streak, I will trade small and gradually recover. This also gives me the confidence I need after a string of losses.
1. Average Winners Not Losers. It is not “don’t frown, average down”; it is applying the discipline to cut losers short and adding to winners that separates the successful from the unsuccessful. If you have a winning stock then add to it. If you have a losing stock then get rid of it.
2. Never Let a Winner Turn Into A Loser. Greed is the cause of this mistake. Let the market tell you when to exit a trade, not whether you have a profit or not. “If your trade is acting well, as defined by key indicators, and the market activity is supporting your position, stay in. If not, its go time!” Do not let a good profit vanish into thin air because you want more than the market is willing to give.
3. Never Mix Disciplines. If you day trade then day trade and do not let a day trade turn into a swing trade. If you swing trade do not let your swing trade turn into an investment. Follow the rules based on the discipline of your time frame.
4. Never Try To Trade Back A loser. In other words, each trade is a new one and should not be used to win back money lost in the last trade. Always trade in the present not in the past where too many emotional and psychology factors can affect the current trade. Revenge does not pay in or out of the market.
This is a good one and something we can all learn from both when making good and bad trades. If you can delay your emotional celebrations or harsh criticisms after the trading day (or trading week) is over, that’s to your own advantage. Far too often traders fall trap to what I call “trading on tilt” where they try to wreak revenge on the market by making more bad trades after the first bad one to get back to even. In addition, if you’re doing really well and making great trades, put your guard up. It is true that the times we are most vulnerable to catastrophic losses usually follow the times we’ve experienced a very hot hand and have convinced ourselves that everything we touch turns to gold.
RULE 1 – Keep losses small. I am more concerned about protecting my capital and ensuring any losses are small, than I am about making money. I’m going to have losses, but I control them and let the winners take care of themselves. The hardest job of any trader is to get out of a losing trade, believe it.
RULE 2 – Do not forget Rule 1.
RULE 4 – Position size every bet in relation to your bank.
RULE 5 – Always use stops, not as a trading tool, but as a disaster avoidance technique.
RULE 6 – Give your trade room to breathe, don’t place stops too close, most beginners lose because of this. Remember, the wider the stop the smaller the trade size. This is also dependent on the timeframe you are in, simple tip if you are trading on the 5 min. chart. Check the 10 min one as well. Stops should be placed visually in my opinion.
RULE 7 – Don’t be greedy, appreciate small and consistent gains. Once you’re in a profitable position, consider moving your stops – especially to break even – and then you are using the broker’s money. If your software has the facility, then trailing stops could the answer.
RULE 8 – Accept that the markets are totally random and unpredictable and practice makes perfect – give yourself time before trading ‘live’.
RULE 9 – Control REVENGE, after a loser take a break, always. Never strike right back, never, and never double up to recover your losses.
RULE 10 – Never HOPE that you will win, trade only when you see a good trading opportunity, and remember live trading is different mentally from demo trading.
RULE 11 – Keep accurate records of each and every trade, winners and losers, even on a demo account, you must learn the correct habits.
RULE 12 – Eliminate fear, fear of failure and fear of trading. If you suffer from fear then trading is not for you.
RULE 13 – You do not have to trade, if there are no good trading opportunities then do not trade, there is always tomorrow. You can always spend the time practicing new techniques on a demo account.
RULE 14 – Take full responsibility 100% for your own trading – only you can win at trading, do not rely on any external crutch to blame.
RULE 15 – All markets are bearish, they will eventually reverse, prepare and profit from them.
RULE 16 – If you lose, bet smaller. If you win, bet bigger. (more…)
A few quick caveats:
Even the best traders in the world book small losses on a regular basis. If you manage your emotions with consistency and if you strive for a disciplined trading mindset, then you should have no problem surviving a string of bad trades and showing profits at the end of the year.
1. I will create game plans for all my trades. |
| 1. Refusing to define a loss. 2. Not getting rid of a losing trade when it is obviously a loser. 3. Getting locked into a bullheaded opinion about market direction. 4. Focusing on monetary value of trade instead of market structure. 5. Revenge trading to recoup a loss. 6. Not reversing a position when the market is clearly changing direction. 7. Not following the rules of your strategy. 8. Planning for a trade and then not taking it. 9. Not acting on your intuition. 10. Giving back recent gains due to overtrading or inconsistency. |
