If you trade long enough you know that it’s not the bad trades that hurt you — it’s the stupid ones that always knock you out. This is especially so in day trading where the opportunity for truly boneheaded moves is available on a constant basis.
Tell me if this ever happened to you. You see a setup, but you are late to the chart. Maybe you were off the desk for coffee or someone IMed you and you had your eyes off the ball or you just hesitated to pull the trigger. Trading is timing and day-trading is the Swiss watch precision of timing. But you shrug off the feeling and plow into the trade anyway and like a weak tennis player that is wrong-footed you are almost always stopped out.
How about this. You see the setup forming. It right there, but not quite, According to your valuation model its a bit too early, but you can’t wait. You. Need. To. Be. In. That. Trade. Again like a tennis player that lunges too early and misjudges the ball, you get into the trade only to see it stop you out, and then reverse and hit your take profit.
Now, those are common mistakes, that all of us make. But what happens afterward — at least with me, and perhaps with you — is the true pinnacle of stupidity. Angered at the idea of an unforced error you double up and try to smack market right back. Of course, the market smacks you. Once. Twice. Sometimes even three times before you come to your senses and stop shoveling money into revenge trades. Now that is truly stupid and yet I do it all the time. So, here are my thoughts from the school of hard knocks on how to stop the insanity.
1. Define BEST. In the calm of the Asian session, after the day to day combat has ceased, mentally replay every trade you made. Go back to the charts and FORCE yourself to see what worked and what didn’t. Very quickly you will see the common properties of all your winners. Now slow it down and write out step by step what happened in each winning setup. Look at that list. Circle it. And then start each day writing out by hand. Yeah I know that sounds stupid, but that is the only way you will absorb the knowledge, Typing does not work. Memorizing does not work. Only writing out by hand will help you correct your behavior.
2. Separate all trades into BEST and REST. No ambiguity. No subtlety. No gradations. It’s either best or rest. In the heat of the trading day, we don’t have the luxury to be nuanced. As human beings, we are naturally binary animals. So play to your instincts. Now here comes the most important part. Trade REST at one-fifth the size of the BEST trades. That means if your normal size is 50,000 units, trade REST setups at 10000 units. (I am assuming that in case of day trading all your setups have the same stop and take profit criteria.) Note I am not telling you to not take garbage trades. You will do it. I will do it. Everyone who trades will do it. I am just telling you to take garbage size. In trading there are only three ways to avoid bad losses — you can wait it out. You can widen out and average out or you can stop out small. The first two choices will always lead to blow out. The third is the only pragmatic solution to trading.
3. Never trade without a ROBOT. I never let an EA select my trades, but I always let an EA manage them. This does two things. It always protects my risk once I am ahead on the trade and it gives me the peace of mind to hold the trade completion. As I’ve said many times before, trailing trades is the least efficient way of trading except for all others. But here is where all of us get into trouble. How many times have you been away from the desk, take a look at your phone, see a setup and jump right in using the MT4 app. Don’t do it. Almost every major blow up I’ve ever had, started exactly that way. You are basically trading manually which almost always results in adding to the positions until the size swells and the losses mount into the thousands of dollars. Want a better way to trade by mobile? Put Microsoft Remote Desktop on your smartphone. Configure your VPS and place every trade via a Robot. This way risk will never get away from you.
4. Never add money to your account. (This assumes you haven’t blown up, in which case by all means) This is actually a great piece of advice from Marty Schwartz — an old 1980’s trader who wrote one of the best books on the subject. Marty believed that you never increased the size until you could recoup and then double your capital. This forced you to focus on your setup and hone it mercilessly until you had the skill to trade larger. Remember the only thing greater than winning is coming back from losing.
5. Love your losses. If you took the BEST trade and it stopped out that not only natural but good. The best day trading systems are only 70%-80% accurate. That means every day at least 2 out of 10 of your best trades will be losers. Expect them. Accept them and know that control is the biggest trading skill of all.