Coaching group I am a part of got a homework assignment. We are two give an advice to a hypothetical new trader regarding two of the most likely problems they will encounter. It’s intended to benefit the person dispensing the advice, not the other way around.
#1 Inability to accept/take initial loss.
Loosing in a trade seems so final and irreversible. You start extrapolating … if I loose X every trade, I will be down Y by the end of the month and out of money by the end of the year.
Also, due to mean reverting nature of the markets, loosing trades always seem to come back and even turn into would be gains!
Advice: Taking losses is part of the job description for a pro trader! Losses are an integral part of trading, they must not be avoided! They must be accepted to be considered a professional trader.
Inability to take a pre-determined loss, will lead to taking much bigger loss eventually or sitting in a draw-down watching opportunities pass by. But the biggest issue is - you will never be able to size up because you can’t trust yourself to take that initial loss!
Condition yourself to accept the pre-determined loss prior to taking the trade. If you have the edge, losses are just expenses of doing business. If you don’t have the edge, losses are your insurance premiums for surviving long enough to gain the edge.
#2 FOMO
As a new trader, it’s difficult to understand context in which you are trading. Some days require to be more aggressive, some more patient, some to be inactive. Because day traders have limited window of opportunity - usually around the open -
you will often experience urgency to take a trade because, if you miss this one, you may be sitting on your hands all day or try to force trades. Related to this is taking entries pre-maturely. It’s difficult to see your would be trade work without you.
Advice:
Condition yourself to seek perfection with your signals. Expect the stock to do exactly what you expect it to do. If it doesn’t, let it go! This was not your money to take. If you take the perfect signal which does not work out (because it’s still a game of probabilities, not certainties), you can accept it. But if you take a sub-par signal and it results in a loss (see#1 above), you will fill like an idiot.
Have a maximum number of signals to take per your trading window. This number must be small enough to make you very selective and patient. Accept the fact that you may not trade at all that day. Let go of “missed” opportunities.
#1 Inability to accept/take initial loss.
Loosing in a trade seems so final and irreversible. You start extrapolating … if I loose X every trade, I will be down Y by the end of the month and out of money by the end of the year.
Also, due to mean reverting nature of the markets, loosing trades always seem to come back and even turn into would be gains!
Advice: Taking losses is part of the job description for a pro trader! Losses are an integral part of trading, they must not be avoided! They must be accepted to be considered a professional trader.
Inability to take a pre-determined loss, will lead to taking much bigger loss eventually or sitting in a draw-down watching opportunities pass by. But the biggest issue is - you will never be able to size up because you can’t trust yourself to take that initial loss!
Condition yourself to accept the pre-determined loss prior to taking the trade. If you have the edge, losses are just expenses of doing business. If you don’t have the edge, losses are your insurance premiums for surviving long enough to gain the edge.
#2 FOMO
As a new trader, it’s difficult to understand context in which you are trading. Some days require to be more aggressive, some more patient, some to be inactive. Because day traders have limited window of opportunity - usually around the open -
you will often experience urgency to take a trade because, if you miss this one, you may be sitting on your hands all day or try to force trades. Related to this is taking entries pre-maturely. It’s difficult to see your would be trade work without you.
Advice:
Condition yourself to seek perfection with your signals. Expect the stock to do exactly what you expect it to do. If it doesn’t, let it go! This was not your money to take. If you take the perfect signal which does not work out (because it’s still a game of probabilities, not certainties), you can accept it. But if you take a sub-par signal and it results in a loss (see#1 above), you will fill like an idiot.
Have a maximum number of signals to take per your trading window. This number must be small enough to make you very selective and patient. Accept the fact that you may not trade at all that day. Let go of “missed” opportunities.
