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1. The maximum loss we are willing to take on any trade is determined before the actual trade is put on and will stand for as long as the position is active. Respecting a stop can never be a shameful act; disrespecting one, on the other hand is a disgraceful feat.
2. While the target level should never be tampered with, the stop level, can be adjusted as the trade progresses, but only in the direction of the target and never the other way. The idea behind this is to minimize the damage in case the market turns against the trade. A well-chosen point where the stop is moved is not just a spot on the chart - it should bear technical significance. Pulling a stop to breakeven is simply asking for an early exit.
3. Bailing out of very healthy trades at the slightest sign of counter activity, grabbing whatever tiny profit, is a surefire way to remain forever stuck in the non-profitable phase of trading. The urge to get out of the trade when it is still technically valid can be extremely powerful.
4. It is not uncommon for a trade to come dangerously close to being stopped out. It is important to not hit the exit button. And as the corollary, there must be no reluctance to pull the plug on a position when it is time to bail out. Not exiting an invalid trade is the cardinal sin of trading.
I find a nice setup, say a double doji break. I enter and it starts working. It climbs up half way to the profit target.
….. and I get out at +5 instead of my fixed target of +10 – after I have placed the rule right in the previous post of “never tamper with the target”. So I ask myself – why +5 and not +10?
After studying my trades I found that there is a very specific reason I do this:
-> It is an emotional reaction that is a residue of a previous trade – for e.g. if my previous two trades came very close to the target and then turned violently against me then a subconscious register flips and wants this not to happen again…. So early profits seem ‘sensible’.
So now I hope I will be able to control myself knowing it for what it is.
Sometimes I take trades that are not even remotely justifiable using my method / setup OR EVEN INTUITION. I fade strong trends, take countertrend trades trying to predict that ‘the final point of reversal is now’.
Actually, the truth is, if I would have waited then there would have been a real trade which actually shows up – with accompanying logic and all. However at that point there are two things that are tying auto-knots in my head:
- FRUSTRATION: Too tired to care, but too emotional to shutdown the platform and cry yourself to sleep
- EGO GO: A state where you are willing to lose a lot of money because your ego is married to that trade.
Solution: Recognize this early - EMOTIONS shape the entire perception of the everything you do in trading.
Recognize that there are situations that are best avoided, like letting a losing trade run away to such proportions that the self-damage is already done.
The key is learn to recognize, and walk away like hell from such situations – the way you would avoid an unsafe neighborhood.
And respect and love yourself. We will automatically behave better.
After ten years of doing this, sometimes computing the grand total of earnings puts me into an Eeyore state. I guess if I really go to a social place and ‘confess’ people will be like ‘What the f___, you only made ____ after ____ years? How can you seriously waste any more time on this?’
My answer is (to this imaginary audience who is looking at me scornfully) ‘By trying earnestly to do this, even after these setbacks, failures as you call them – I have a ton of insights, know the blueprint of my trading plan inside out, and I am constantly learning about myself and what works for me and am using my failures as my lessons and I am succeeding by exposing myself to thinking how good traders think. I am actually asking myself more questions than you are, so thanks for all the additional feedback!’
I see that you have persisted in trying to find out if I am really a trader - is it really necessary or useful? The attempt is bound to be a failure, because neither you nor anyone else knows anything at all of my life as a trader; it has not been on the surface for anyone to see!
'I' transformed my nature from what it was to what it was not. I did not do it by a miracle - I can show what could be done and how it could be done. I did not do it by a miracle without any process. This was not a mere absurd freak of Chance without meaning or consequence. I also did not do it by myself alone - great are the helpful efforts of others.
The strange thing unlike other vocations is that it cannot be developed by training but by a wide haphazard activity developing ideas from all things read, seen or experienced. That is not training, it is natural growth.
My life as a trader has been a battle from its early stages and is still a battle: the fact that I wage it from a room upstairs and by spiritual means makes no difference to its character. It is natural, I suppose, for others to think that I am living in an august, glamorous, dreamland where no hard facts of life or markets present themselves. But what an illusion that is!
You also think then that in me there was never any doubt or despair, no attacks of that kind. In fact I have borne every attack which human beings have borne, otherwise I would be unable to assure anybody "This too can be conquered."
Only slowly victorious labor is possible on this path.
Do not insist on the hard, hampered, roundabout and difficult journey.
You say that this way is too difficult for you or the likes of you and it is only born traders like myself that can do it. That is a strange misconception; for it is, on the contrary, the easiest and simplest and most direct and anyone can do it, if he makes his mind and vital quiet, even those who have a tenth of your capacity can do it. It is the other way of tension and strain and hard endeavor that is difficult and needs great force.
What have you learned so far? It looks to me that it is not worth the effort you are putting, with very little to show … (!!)
Basically this is a journey of skill building - you study something, try it yourself, suck at it, make errors, learn from errors, make really stupid errors, again learn from those errors. In this ‘skill building’ process, you learn most about yourself than the markets or anything else!
You internalize things that you are not even aware of that keeps you out of trouble. Basically it is all about gaining a huge dollop of confidence in yourself that is unshakable and based on good habits. The process is the edge.
- You have to learn to be comfortable with everything being somewhat ambiguous.
- You have to deal with the psychology of “being wrong”, “fear of losing money”, or the “fear of missing out”. The aim is to gain enough confidence in your consistency - basically it is a degree in acquiring responsibility with a capital R.
One thing I have improved upon a lot (and I don’t know if my advancing age has something to do with it) is that I am able to control my emotions, especially anxiety and fidgetive tendencies – I say this because earlier I used to pluck setups out of the thin air, so to speak – now it is more black and white. As an engineer I like problems and analysis and waiting = boredom so I need to ‘work on material’ or ‘figure it out’ and I used to go crazy with waiting… waiting, but it is much easier now, due to practice and habit formation.
