Good morning fellow traders and Steemians !
Since long I haven't written an article on trading execution or trading psychology, so here it is ! As many of you know I am a professional full time trader and when your income depends on making the right decision in a split second you want to get it right as fast as possible. Every time a losing trade, execution or behavioural pattern is repeated it costs us capital and capital my friends is the speculators most important weapon, it's like a tennis racquet for the tennis player. So the speculators #1 priority is preservation of capital. I like how Paul Tudor Jones said it "The most important rule is to play great defense, not great offense. Everyday I assume every position I have is wrong."
Preparation And Accountability
Having a plan before entering a trade and actually executing your plan are two very different things. Myke Tyson said it best "Everyone has a plan 'till they get punched in the mouth."
I find this to be very accurate. In trading as in boxing it is essential you have a strategy, a game plan that will shield you from getting a hit that can knock you down. If you have ever traded anything you know the weird and often painful event of not following your pre-determined plan, especially when you are losing money. Let's take a look at the example below to see if you can relate
Example
Let's say you have a bankroll of 5000$ and you decide to buy stock XYZ at 129.96$ with 100 shares (every one cent move costs you 1$) Your plan is to risk 1% of your bankroll (50$) per trade. You place your stop at 129.56$ for a 40$ loss and calculate slippage and execution cost to be ~10$. The stock goes down and it nears your stop then you decide to cancel it, bacause "your broker hunts for your stop". Unfortunately XYZ goes to 126.56$ and the initially 50$ loss grows into 300$ and you still hold your position. You end up closing the position at 124.56$ because Trump tweeted some crazy stuff and market sold-off hard ! In the end you have lost 10% of your stake and have an open wound to heal.
The aftermath of this event is crucial for your trading career and mental state. Many traders swear that they will never repeat the same mistake, they read, they analyze and in the end they forget and repeat the same thing over and over and over again. Note that this is only one of the scenarios for losing money in the markets, be sure that there are many many, more.
So what should you do after you acknowledge that you executed a trade poorly ?
- WRITE IT DOWN
Importance Of A Trading Journal
I have read many books on trading and to be honest I can't think of a successful trader that doesn't have a trading journal of some kind. In short a trading journal should have at least the following - symbol, size, side, entry point, exit point, why did you enter, why did you exit, did you have a plan for the trade, in what mental state were you in when you initiated the trade and of course you can add whatever suits you or is relevant for you. There so no one fit all formula. A simple google spreadsheet can save your tens of thousands per year. I will make a spreadsheet on google and share it with you guys soon enough.
The big advantage of writing things down is that you can read them later. Jesse Livermore (legendary Wall Street trader) overview the trades for the whole year in January the next year in a bank vault with $20 Million in that vault, locked for 60 hours. Of course this is a bit extreme for my taste, but it surely is the right approach. A lot of traders advice to sit down in a Saturday morning and review your week/month/quarter. I know that it is easier said than done (believe me) but it is extremely helpful.
Why To Improve At A Discount ?
I think the more you write and analyze the cheaper it gets to learn the lesson. When you write things down your mind can't actually continue to fool itself and sooner or later reality will hit you. Our brain tries to protect us and it often does this by deception. It will make us believe all sorts of things - "you are fine, you didn't lose too much - you have plenty behind", "you are not losing money in this product" and so on. When you have things written this can't happen because you are perfectly aware of your situation. When you see that you lost 12 times money in XYZ a bell will ring ! Be smart and disciplined. Stay focused and hungry.
Bonus
Things you should be aware of everytime you initiate a trade
- Acounts Size
- Your pre-determined risk parameters (depends on acounts size)
- Mental state ( Is this an impulsive/revenge trade or a well-thought trade)
- Stop Loss order (where to place it and how to place it)
- Target
This is the bear minimum.
This article came out a bit longer than I wanted. Stay tuned because I have decided to be more active on Steemit, especially on the trading front. I am open to questions and suggestions ! Thank you for taking the time and have a great and profitable trading !