When a trader operates from a position of fear, they not only let fear into the car, they’re placing it in the driver seat. When you have large position sizes and no strict plan, you’re allowing fear to drive recklessly at fast speeds, putting your life in danger. Without a formal hypothesis jumping into a trade — when it hasn’t been properly researched, you’ve now added blindfolds to your fear and hoping it doesn’t crash the car. The odds are no longer in your favor, wouldn’t it be best to:
- Slow the car down
- Get the driver (fear) to pull over and kick it into the backseat
- Take the wheel and begin driving after you’ve tossed the blindfolds out the car
- Driving in first gear before you shift into higher gears
This is how trading should be, a process similar to how you earn your driver’s license by reading up on all the driver’s manual literature, understanding the rules, attending driver’s ed and driving for 6 months with a permit and a designated driver, then eventually hitting the road.
The push
However your story may be similar to mine — when I entered trading, I was using working capital from all the equities I have accrued from my decade of working in tech startups, through IPOs and acquisitions. In the first 3 months alone, I was able to make $105K in profits, which led me to quit my job and pursue trading full time. The rude awakening that was about to hit me, was that I was operating in a common period of beginner’s luck and that the luck would run out.
With minimal understanding of chart patterns, technical indicators, and general trading principles, I was placing blind trades in a bullish market, with massive position sizes. I had no fear and was letting my winners run as they naturally would have, unshaken by and natural volatility with price movement.
Then, something hit me like a ton of bricks: my first massive loss. The market was switching from bullish to bearish and by enforcing my will on the markets, I was entering positions I had no business entering in, devoid of hypotheses. Rather than exiting losing positions, I had this “genius” idea of turning those losing positions into swing trades, selling options against those positions until the expiration date where I assumed the price was bound to bounce back. This worked for many trades, while I took massive losses on others.
It took me a while to realize this was a stupid strategy, as a lot of my margin was tied up in these losing positions and the dynamics were just not changing. Instead, valuable capital was tied up in these long derivative contracts that could have been used for intraday trading. I wised up and decided to dump my positions in favor of freeing up capital, and with that I had my worst day on 09/19/23, when I registered a $48K loss in a single day. Any days I would register profit, went from an easy $5K - $7K, to barely making $500 - $1K. It’s obvious that I was spooked by fear. Not only that, but I was gambling with certain trades, shifting away from tactical trades, to shooting from the hip. Some days I would clock as many as 70 trades.
I couldn’t trust myself, and when you can’t trust yourself, what’s the point of creating a plan or strategy if you can’t trust yourself to stick with it in the heat of the moment? Upon further reflection, in the spirit of using a basketball analogy, it was clear to me that as an NBA player, I was jumping into season games. Convinced I can take the game-winning shot, I was continually placing myself in a position to handle these high risk situations, yet in hindsight I failed to properly attend practice, do the necessary mental and physical training, or nail down the basics. I would shoot for the three and clearly miss. It was time for me to bench myself and continue practicing to improve my game.
The way to do this is to begin trading in an environment where the stakes aren’t as high and your nerves are calmer. In software development, we call this the sandbox environment, where you can test your code freely and not impact the core app functionality in production. I had to scale down before I can scale back up.
The program
The goal was to reduce my position size for any trade down by 1,000x to a single share at a time. This removes any nerves that naturally come with making any trades because it guarded my account from any drastic losses, giving me the space to analyze my trades afterwards without blowing up my account.
I then inspected my A, B, and C games to see what I was doing well, and what I was neglecting. It became apparent to me that there were a few areas I needed to improve upon, so I designed the success criteria of this program around the following:
- High win rate → Entering any position should be backed by a strong hypothesis. Whether the reasoning is because of the market trend, the chart patterns on multiple time scales, or the various indicators that strengthen your case, you must have these backing your reason for jumping into the trade. Only when you patiently do this will you learn to not be hard on yourself for a loss. You can control your entry and exit, but you can’t control the stock’s price action. This is vital for learning to trust yourself.
- Higher proportion of profit vs loss volume per single trade → In the spirit of letting winner run and cutting losers off at the knees, the PL score compares the average dollar per share of profit vs losses. A good baseline is 1:1, or 1.0 or higher.
- No significant single trade losses → No single trade should have a loss that is greater than or equal to $2.00/share. This amount is sufficient
- No overtrading → By limiting your daily trades to 10 (which is honestly being generous), you’re more inclined to be thoughtful about which positions you enter. Being selective of the few trades you enter is like a trained sniper who spends most of his time scoping his prey before executing the shot and immediately positioning himself for the next trade.
- Not chasing price → Avoiding market orders is a better way of forcing you to enter trades with a clear plan. As soon as you make an entry (which can be through market orders), it’s essential that you have a clear exit in mind based on the price action. You’re practicing letting the price come to you (in whichever direction it may travel), rather than chasing the price. By forcing less than 20% of your trades’ exits being market orders, you’ll allow thoughtful limit or stop loss orders to define the bounds of your bet. Said differently, you can perceive a position entry as follows:
- I’m entering a long position at $45. I immediately set my stop loss to $44, giving myself a $1.00/share limited loss, but I am entering this position because I believe the upside potential is that this trade will rally up to $46 (my exit) before it dips to $44 (my stop loss). Now that my bet has been formalized, I will sit back and watch the trade play out.\
- In the example above, you can slowly move your stop loss value up higher if you’d like, but after giving your trade some time to exhaust any retracements it has left in it. I see this as not chasing price, but closing in on a higher likelihood you exit a position after letting it exhaust its energy.
- Properly adding a stop loss to every order → (Not shown in criteria), the adding of a stop loss to an order is something that must be ingrained naturally. It must be made as soon as one enters the position
The success criteria looks back at 21 calendar days, an upper bound of 15 trading days, and changes the color of the criteria to green once that criteria has been met.
Only when all 5 criteria are green, am I able to then size my position up by 10x. Once I do, I must wait at least another 21 calendar days before I can use another set of all-green success criteria to then advance my position another 10x, to 100x the position size. Rinse and repeat until you achieve the position size you were trading with before entering the program.
You can easily automate this process as well using Google Sheets, which is where I keep the raw entries of my trading manifest:
- 12d+ profits → (column R is the trading date and column AA is the total daily profit)
- Target → 12 or higher
- 10d+ PL score >1.0 → (column R is the trading date and column AC is the average daily PL score)
- Target → 1.0 or higher
- To calculate the PL score, use this formula
- >$2/share loss → (column G is the trading date and column L is the average profit/loss per share)
- Target → 0
- <10 trades/day → (column R is the trading date and column W is the total trades made in that day)
- Target → Less than 10
- <20% market orders → (column G is the trading date and column P lists the exit type for each trade)
- Target → Less than 20%
=COUNTIFS(R:R, ">"&TODAY()-21, AA:AA, ">0")=COUNTIFS(R:R, ">"&TODAY()-21, AC:AC, ">=1")=IF(ISERROR(AVERAGEIFS(M:M, M:M, ">=0", I:I, R140)/ABS(AVERAGEIFS(M:M, M:M, "<0", I:I, R140))), 1, AVERAGEIFS(M:M, M:M, ">=0", I:I, R140)/ABS(AVERAGEIFS(M:M, M:M, "<0", I:I, R140)))=COUNTIFS(G:G, ">"&TODAY()-21, L:L, "<=-2.00")=COUNTIFS(R:R, ">"&TODAY()-21, W:W, ">10")=COUNTIFS(G:G, ">"&TODAY()-21, P:P, "Market order") / COUNTIFS(G:G, ">"&TODAY()-21)Ultimately you want to know you can trust yourself to enter and exit a position, the right position, because of firm principles, strategy, and plan that you have hand-crafted. Without either of those, you’re gambling, and if you’re gambling then fear has plenty of room to roam because fear is based off the unknown.
In taking your few trades for the day patiently, not jumping into any price action for the heck of it, and avoiding revenge trades, you will have the strength and resolve to scale your position size up in no time. If you’ve ever done something with a trade that made you kick yourself for repeating a mistake you swore you wouldn’t make, it’s because you haven’t mastered your own self. Self-discipline will be the key to trusting yourself and trusting yourself will ease your nerves.