There have been periods in my trading where I have a great win rate, I make great trades, but my profits quickly blow up because of steep losses. Every time this happens, I always regroup with a plan. First, it was “always add a stop loss”, then it was “No loss greater than 200 points”, and each and every time I run the numbers I convince myself that I can problem solve my way out of this by adhering to those plans.
Except, it never works.
Theoretically it makes sense, but the reality is that I come up with principles for how to avoid making stupid decisions, but in the heat of the moment, I forget to breathe deeply and center myself so I come from a calm place, set a stop loss as soon as I enter the trade, or any other number of new methods I learned to hedge against my reckless self.
What I’ve come to realize, is that I need to perfect the execution of my game before I add on size to my positions. I’ve made mega profits before, so I know it’s possible. But time has stumped me into doubting myself and my abilities, it has caused me to fear losses with all my might, and it results in poor trading.
I need to go back to the basics. For the time being, I plan to trade only single shares at a time until I get a good win rate, P+L ratio, and string of winning days. Realistically I should do this for at least a few months until I can trust my abilities, then I can 10x my position size. Rinse and repeat for another few months, and then I can 10x that position size as well until I work my way back to the positions sizes I have been trading with.
This is akin to Kobe Bryant playing in the NBA playoffs. Kobe Bryant can confidently play in the playoffs because of how much practice he puts in off-court. With trading, putting serious money behind trades is like playing in the playoffs and getting steamrolled by nuking your profits is akin to entering the big leagues only to have a rude realization of the performance difference. What practice would we have off court in this analogy? It wouldn’t necessarily be trading psychology, because athletes get those too. It’s not analyzing your trades, because that’s like reviewing plays in the playbook. No — it’s trading in the markets in realtime but with super small share size until you perfect that strategy. This is like Miyamoto Musashi who makes practitioners of the sword practice slow and steady movements of the sword for a VERY long time before they can take their first, actual swing. It’s more important to understand the core fundamentals
For me to do this effectively, I need to use this conscious effort during my practice to perfect the following:
- Enter a position where the share size is at least $20 or more
- Because I’ve been entering $2-$4 trades with MASSIVE position size, I not only easily get stopped out, but market orders always undercut you and the ATR is so small that you’re guaranteed to lose. Always trade with a healthy share price so you can give your stop loss ample room to breathe (and enough time to place your stop loss).
- Place a stop loss immediately after entering a position
- In cases where the stock suddenly spikes up or down, I always get screwed over by taking a massive loss. In fact I have had times where Fidelity’s ActiveTrader Pro freezes up on me and I’m in a massive position that’s going against me. Make it a habit to ALWAYS place your stop loss order then periodically move it up or switch it with a limit or market order.
- Enter a trade with a solid hypothesis in mind
- I should never enter a trade without looking at all the factors that would lead me to enter a trade, which are:
- Strong technical indication
- Market trend
- RSI value in the zone
- Proper placement above/below the VWAP
- NEVER enter a revenge trade
- When you find yourself quickly finding ANY trade to enter, or when you don’t have a good hypothesis for a trade, or when you generally feel like you’re shooting from the hip — you’re revenge trading. At this point it’s pure gambling, which goes against everything you believe in.
- NEVER enter a trade I spent less than 5 minutes studying
- If you’ve spent less than 5 minutes, you haven’t given the market pattern enough time to coalesce into your psyche. You just see a quick formation, are eager to take a trade, and again are just gambling.
- NEVER place more than 10 trades in a day
- Honestly it should be 5, but we can stick with 10 to start. This will force you to be thoughtful about which trade you plan to make and tightening up your hypothesis you want to lead with.
Seriously, do you?
Everything that’s been said above would ACTUALLY work if you followed through with these principles. The uncertainty that arises causes you fear and the reason there is uncertainty isn’t just because of the nature of trading. It’s because you cannot trust yourself to execute the position as you had originally planned.
Go back to building the basics and once you have those principles engrained in you like its second nature, you’ll have more confidence and trust in yourself to execute like a machine.