This is when the light bulb went on for me. I had my aha moment after I actually sat down to review my trades (as suggested in a $60 trading book that offered little else, but was still worth the money for that one piece of advice). What I discovered was that I was a good stock picker. I was hitting on 70 percent of my trades, but there was always that one trade that would kill me. I had no concept of position size yet, or risk management, but on this day I started a journey that lead me to the holy grail of trading.
Today I talk to tons of traders, and inevitably we talk about trading goals. These days there is more information out there and most beginning traders have some idea of position sizing, so the goal always starts out sober. It goes something like this:
Just like you Paul, I'll start with a small 5-10K stake, and consistently build it up to $100,000 in a few years. I will keep position size small and only risk 1 percent per trade. As it gets bigger I'll get even more conservative.
It all sounds so good. The problem is, that is not what we really want. What we really want is to hit the lotto and get lucky with one or two stocks that change our lives. We tell ourselves we will do it the "right way", but really we just want to get there as fast as possible.
That's why just about every trader that says they will do it the right way ends up doing every thing wrong. They make bigger bets than their account can handle. In the beginning they might even get lucky, but greed takes over and they get even bigger. Whereas they were supposed to start trading more conservatively, they make even bigger bets. Eventually one of those big bets fails. Then they make another one that fails. Now, instead of sobering up and building slowly, they try to win those losses back. That is the beginning of the end.
This scenario is all too commonplace. I know because I have had conversations similar to this one more times than I can remember:
Stressed Trader: Paul, I screwed up big time and need your advice.
Paul: You did not just blow up your trading account again, did you?
ST: No Paul, I didn't, but it's now half the size, so I'm going to start trading bigger.
P: Oh, so you are asking me the fastest way to blow up your account, eh?
ST: Quit messing with me Paul, I've only got $5,000 left to trade and I need to make back my money fast.
P: Do you remember what you told me when you started with 10K?
ST: Yes, but I need to make it back and then I'll go back to trading the "right way".
P: I can't help you son, you are going to blow up your account, and you will learn from it. Come back to me when you have another stake.
Now guys and gals, if you are ever caught in this situation and feel the urge to get bigger:
DON"T DO IT!
I feel this kid's pain. I have been there. I know what it's like, but I also know I never want to feel like that again. The average retail investor starts with around $10,000, and the prevailing wisdom is that 95 percent of traders fail. Why do they fail?
It's because they are lying to themselves. They don't want to incrementally grow their account. They want it all now. Be honest with yourself and ADMIT IT!
Now once you admit it, sober up and fix your brain. You know you have a better chance getting hot at a blackjack table in Vegas than getting lucky trading. To succeed at trading, you know luck is not an option. You must fix your mental trading game.
I know what's coming. All right Mr. Market Speculator, that all sounds good, but how do I do that?
I'll admit it takes more than what I can write in one blogpost. It takes hours of dedicated training. However, you can start by:
1. Always having a game plan for every trade
2. Have automated rules in place for position sizing
3. Never risking more than 1 percent on any single trade
4. When you feel the urge (and it will hit you from time to time), dedicate yourself to a battle of mental warfare with yourself. The evolved, intelligent, emotionally sound you needs to beat the crap out of the greedy neanderthal dreaming of a big payday.
I know this sounds like a bit much, "battling yourself with a war in your head". Trust me, I've read all the self help NONSENSE. I do not want you to become a self help junkie. That just becomes another headache in and of itself. Nor do I want you to create a ton of complicated rules. Just get in your head and beat the greed out. It's that simple.
Once you have won a few battles, it gets easier to fight your true nature. A feedback loop will form a HABIT and at some point you will no longer be a hypocrite. You actually will want to build it the right way and the thought of taking on too much risk will make you sick.
Finally, once you start analyzing your trades with a focus on risk and position size instead of stock picking, that when you know you have achieved true TRADING ZEN.
Taken from the trade diary of Paul, a market speculator who trades stocks and commodities using technical analysis, chart patterns and trend following methods.
Below are my personal trading rules that I have adapted from my 2 years in the market. I adapt and refine these rules/procedures as I become more proficient in trading. I truly believe the secret of my success has been my ability to trade within myself and sticking to being conservative in my trading. When I tried to ramp it up to fast, which I did from the end of October through November, I failed miserably. I started 2 weeks ago going back to the basics with slightly higher position sizing and I made up for 6 weeks of losses in 2 days. You have to trade within yourself and gradually build yourself up to it.
You can't follow the mods in the room trying to match their trades. That is the main reason that we do not post $ profit amounts of our trades. We do not want traders feeling that they have or are failing because they are not making what we're making. I trade a lot of the tickers that Mike trades but if I was trying to match his profits, I would go broke because he trades more aggressive and with a larger account than I do. I trade within myself. Too many traders try and compare themselves to other traders in chat and try to follow those that are posting trades all day long. Most are paper trading or calling out trades they didn't take after the fact. 24 tickets in Suretrader will cost you about $175. A killer for a small account. The few that are actually trading in most rooms will not post trade after trade all day. After a while you will know who is live and who is Memorex, but the point is no matter what you should not follow or compare yourself to other traders in terms of profit.
1. I always have a plan prior to entering into the trade. I have a target entry point/level that I base my trade off of, my stop level, and my profit targets to book profits on the way to my ultimate profit target.
2. I only trade the tickers that meet my criteria and I only trade my strategies. I will not follow anyone into a trade based on their setup or strategy.
3. I will always have my watchlist ready to start the trading day. I will write down my thoughts on each ticker on my watch as well as potential entry,stop and profit target levels. If I do not have any tickers to qualify for my watchlist, I focus on my opening range scan to identify potential opening range breakouts or breakdowns.
4. My profit targets and stop are determined by support and resistance levels. This could be based off of daily chart levels, moving averages, or psychological levels such as whole and half dollar marks. I also factor in my risk ratio.
5. Do not take a trade that my risk/reward would be less than 2:1 at my first profit target. This will be calculated based on the range between my entry and profit target.
6. Even though I have a small account I don’t worry about how “expensive” a stock is or how many shares you can buy. A volatile $100 stock that moves 10 percent is better than a $3 stock that moves 5 percent, regardless of your position size. I focus on percentage gains, not point gains.
8. I stick to my profit targets and stop once I am in a trade unless the price action dictates a change. I will not micro-manage a trade, but I will monitor the price action throughout the trade.
9. I strive to keep losses small and in check while letting my winners work keeping my wins larger. I embrace small losses because if they are withing my risk parameters I consider the trade a win. Successful traders do not have small wins and big losses.
10. I always pay attention to the overall market (SPY) when trading individual stocks. This helps me determine the likelihood of my trade plan being a successful one. For instance if the SPY is trending down and trading below the VWAP, a long trade would not make sense for me to trade.
11. I have said it before and I will say it again. I am from the K I S S school. Keep it Simple-Stupid. I only have the indicators on my chart that are necessary to my trading. Indicators only reflect what we see in price and volume. I only use moving averages and VWAP
12. I keep a trade journal and I study my trades every night. I could not be successful without doing this. Reflection is a very powerful tool.
I teach and mentor traders everyday in the Averagejoe Trading community. I stress education and practice before you start risking your own money because blowing up a paper trading account is a lot less painful than losing your personal savings trying to learn how to trade. I have the tools and personnel to give you all you need to be successful. The rest will be up to you. If you would like to learn more about how I trade email me at firstname.lastname@example.org. I host Sneak Peek Wednesdays every week.