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Guys, hope your trading well out there. This is great market environment to be trading in as we are seeing a ton of volatility on a daily basis. However, volatility can be a gift or a curse. The biggest mistake that many novice traders make is not recognizing change. What do I mean by that? Markets NEVER continue to behave in the same way, every single day. Bull markets turn neutral, or go sideways. Sideways markets start to break down and kick off bear markets.
These changes in character often destroy wealth QUICKLY. Even the best of us get trained by the markets to trade in a certain way, especially when it is going well. Then, all of a sudden, the markets character shifts and your profits erode. Those same strategies that you used for the past 6 months just stop working. After 6 months of making steady profits, you decide to steadily lever up your trade sizes due to your new found confidence and this is what ultimately leads to your demise.
The market stops doing what you want it to do and you become paralyzed. Trades start moving against you almost immediately and you are too stubborn to take the loss because "it will come back". Then, it gets worse. You start breaking your rules and doubling down on a bad trade only to see the stock get hit even further. You end up losing a TON of money very quickly. You've given up 75% of your profits, in a month of time. You ask yourself, "do I even want to trade anymore?" You lose all your confidence and start self-loathing and blaming the "crooked" market. I want you to know that you are not alone. Most of us, even the best of us, go through this boom bust cycle many times before our brains adapt and learn that market context is very important and to always stick to our rules. This is a very painful process.
I am sure many of you can relate to much of what I have written about here. I lived it, I get it. Now, what can you do about it?
I have a few ideas, from experience, to help you get thru this never ending churn.
1) PREPARATION is important. Remember, you are trying to make money and where there is money, there are sharks. Trading is extremely competitive and you have to have a game plan before you go into the day and also a trade. Know where you want to get out if your right or wrong. Try and understand the path of least resistance in the broad markets and try not to fight the trend so much. It will make your life easier and less stressful. Which sectors are strong or weak?
2) You wrote down your rules, NOW FOLLOW THEM!. Some of you may trade momentum stocks or story stocks. Some of you may only trade gaps. Some of you may only trade indices. Whatever system and rules you design, write them down and really STICK TO THEM. I can't stress this enough; THERE IS ALWAYS ANOTHER TRADE. It is a kiss of death to change your trade management rules after you have gotten into a trade; worse yet, once you break your rules. When you start giving the stock a pep talk, its time to get out.
3) You don't have to be right all the time. This one is important. It is a mind shift for many of you. You are trained that you always need to be right. You are rewarded for getting straight A's in school. Your smart, so you should make a ton of money in the stock market, right? WRONG. To be successful in the market means you need learn how to LOSE.
4) Repetitions are SO important. The only way you become an expert at something is to get your repetitions in. Steph Curry didn't just start draining 3 pointers from half court because he was born with that skill; he shot over a million 3 point shots in his life to get to that level. An airline pilot cant just start flying commercial jets without ever flying a plane. You get the point. Train your brain to spot patterns, manage your money, building discipline, and know when you are wrong (you'll notice I repeat this point a couple times in this post).
This is where a tool like Tradingsim is extremely valuable. For those of you who aren't familiar with Tradingsim, we provide a state of the art day trading market replay tool that acts almost as a time machine. Tradingsim is a DVR for the stock market. You can replay over 500 trading days and practice trading the most volatile stocks of the day. With Tradingsim, we have the best fast forwarding tools in the industry and you can move at your own pace. Let's take an example. Imagine you only like to trade the first hour of the day. In tradingsim, you can literally replay 2 weeks of trading in a couple hours. You speed up your learning process without have to wait 10 days to be able to trade the same amount of data.
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5) Learn how to Lose if you want to learn how to Win. This is the single most important lesson I have taken away from my last 5 years of trading. Keeping your losses small is paramount. The winners will come on their own if you can keep those losses small. This concept ties together points 1, 2, and 3. Have a plan when you enter a trade and try to enter a trade with a reward to risk ratio at least 3:1. Follow your rules and take your losses. There is an opportunity cost to being a bag holder. You cant focus on another opportunity. Don't attempt to think you are smarter than the market or that you can never be wrong. Take those losses people!
6) Stop hacking away after 11:30am EST. My lesson from the last 5 years is that 90% of my gains will come in the first 2 hours. The rest of the day is flat to slightly up and just not worth my time. The momentum in the first hour or two (really first hour) will provide for the best moves; the rest of the day will be less eventful. Trade setups tend to be more reliable in the more volatile periods of the day.
7) Change is good, embrace it. When the markets change, you must change with them. You MUST do this fast. Working on training your mind to be flexible. This means that you may not be right, but a smart trader recognizes QUICKLY that he/she is wrong and course corrects. Adaptation is essential for long term success in the markets.
We can talk about all the strategies in the world, but if you cannot master money management and exercise discipline, you will never win. Fix these issues first.
I would love to hear your thoughts and any lessons learned from you all. We can NEVER stop learning and adapting.
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Here is a quick video of what the tradingsim application is all about: