Some Key Realizations that Foster Profitability In Trading

I lost money for about a year straight once I committed to day trading as a full time profession about 3 years ago. Literally a year straight. About 14 months to be exact. It is unbelievably discouraging, disheartening, disparaging, and every other emotion on that spectrum. If you can struggle through the turbulence, which few can, this is one of the most rewarding professions out there regarding potential revenue generated and just overall freedom, don't give up. Today I want to start to get in to some tips and realizations I came to that helped me emerge from the never-ending vicious cycle of "have a few good days.. give it all back" and a few ways I like to rationalize with myself mentally to help keep everything balanced. This will be a two part post.

I wanted to continue to build off the last blog post with this one as well, where I spoke about the problems with striving for perfection in this game, and how that mentality, while useful in almost every other facet of life & profession, is detrimental for a trader. Learning to become perfectly imperfect & fostering a constant open-mindedness at all times in all trades is essential to success. Today I just want to go over a few of the main issues I see that hamper traders decision making processes and struggles, and some things I've personally put into practice to help combat early roadblocks in building your trading account.

1) Market Open Trading

Everybody wants to trade the market open. It's the most exciting time of the trading day, you're wide eyed and excited and everything is moving with extreme volatility. If you are a newer trader trying to build your trading account, AVOID this time. The best thing you can possibly do is open a paper account and trade that from 9:30-10am. Get the experience without the consequence. Then at 10am, when everything calms down a little and some setups start to emerge, open up your real money account and start your trading day. By this time, trends start to form, stocks gravitate and make moves towards and around VWAP, stocks that rip show their cards and indicate if they're going to continue higher or not by this time - it's just a much more high probability time to trade. There is a time to trade the open, and it can be very profitable, but as an aspiring trader trying to build capital - that is not the time. So having the paper account for the first 30 minutes of the day allows you to participate in the action of the market open so you can can start to get a better feel for it and "trade it", it alleviates the FOMO of just sitting there and watching it, and you are able to get screen time with zero financial consequences. Also remember, one bad trade out of the open can ruin your ENTIRE day, put you in defense mode, "I need to make that back" mode, all kinds of bad stuff. So until you're a veteran, the best way beat this, is to simply avoid it. Just not trade during that time. If you can not pull yourself away from trading in the first 30 mins of the day, then you need to reevaluate your priorities. Any struggling trader, I'm talking to you: Are you here because you think it's a game and it's entertainment for you? Or are you here because you're serious about trading and want to make money? If the latter, then you'll seriously consider this first suggestion. It works.

How to actually trade the market open based off of premarket action & daily chart analysis is another blog topic to come in the future. But this is your best bet currently if you do not have a solid foundation of capital accrued & experience under your belt.

2) Owning Your Own Ideas & Trades 

This is one of the most important ingredients you need in your trading. You absolutely, absolutely, have to create and OWN your own ideas. If you don't, you'll never develop true conviction in your trading. If you find yourself taking a trade just because you saw a well respected twitter guy taking it, or if your chatroom ring leader is taking it, that is NOT a reason to take it.  Ever find yourself taking a loss on a trade, losing confidence and then just staring at your chatroom looking for any idea - in full sheep mode? That is the very thing you need to avoid. 

Here's the things you aren't considering when you see someone post a trade they're taking: You don't know what their plan is. How much capital they've got. Their risk tolerance. Whether or not they're adding on the way up or down. How long they plan on holding. Are they scalping? Whether or not they plan on swinging if the initial idea doesn't work, etc. It's just never a good idea to be a follower without all the facts. In anything in life. Trading is no different. 

Here's the issue, broken down a little deeper and with a recent personal example. It actually just happened to me about two weeks ago. Big pharma company Sage Therapeutics (SAGE) gapped up huge on ++ trial results. Adam Feuerstein was tweeting about it premarket that he really loved the company, and that the trial results & company potential were fantastic. Adam F is an extremely well respected if not the most respected opinion in the biotech world, so I read the tweet and immediately developed a long bias on the name. "Well Adam likes it - and he hates 99% of the companies he's discussing usually. So this one must be good." I saw it have a weak open, so I tried to long the washout. It continued to trade heavy, I added some lower. Added some more lower........an hour and a half later, I ate a sizable 4 figure loss on it, and it ended up fading for the entire day. If you saw the chart that day (Just look up SAGE from two weeks ago about, you can't miss it, it gapped up like 15 bucks) it is so obvious that it was just straight selling right from the opening bell, and I should have just cut my initial long and waited for it to base, or better yet, flipped short. Every sign pointed to sell. BUT...I was being governed by an outside source. I didn't feel ACCOUNTABLE for the idea...I just kept "hoping" it would turn around, and was basing that hope on someone else's trade idea, instead of listening to the chart and price action and my own thoughts. Those are the risks you run when following someone else's idea. Was Adam F wrong? Maybe, maybe not. Bigger picture he may be right. But that particular day, it was catastrophic to be a SAGE long. The problem with a day trade, is that you need to be correct RIGHT then and there. Learn to create your own ideas and your trading will drastically improve. 

There are a million ways to make money in the market. But if you collect all the successful traders you know & admire, while they have a myriad of different styles & processes, there is one trait common to them ALL - they are independent thinkers. That's why they are where they are today - they didn't get there by sitting in a big chat room and following someone else's ideas. They've learned to become self sufficient. This must be your primary goal if you ever hope to develop true conviction and longterm success in your trading. 

3) Reality Checks 

You should have an "Oh shit" handle - or a max risk, immediate no questions asked, bailout number for every trade. Keep that amount of money in cash on your desk. So if you're max risk on a trade is $300 where you *should* stop out no matter what, keep $300 cash handy at your desk. If a trade starts to go red, look at the money. Pick the cash up, realize just how much money that actually is to you. You're now physically holding what you're about to lose, or more, if you don't make the right decision here. It may help bring you back to reality and give you a little more conviction to help stop out of the losing trade thats clearly not working. It is so easy to get disconnected from reality when you're just staring at numbers on a screen all day. You lose sight as to how much money you're actually dealing with and trading, especially when you get margin involved. Here's what I mean. 

If I said "Hey, Johnny just graduated college and got a great new job at X Company, he's making $50/hour." Your reaction would probably be wow! Thats an great salary, good for Johnny he's killing it." 

But for most of us, if we place a trade and then pike out on it for a $50 profit a few minutes later, we think "ugh...I always sell too soon for such small gains" because it's nothing more than a number on a screen. It's not "real" yet. Even though you just made in a few minutes the same $50 in took Johnny (who's killing it) an hour to make.  

So we're talking about the same exact amount of money here. $50 is $50. Yet Johnny is doing great and making a fantastic salary, and you the trader who makes $50 are a moron who sells too soon for tiny gains and hates themselves. See the disconnect? Same amount of money, just different circumstances, and everything changes. The reality in trading is that there is a huge lack of reality. Thats why I like to keep my max risk in cash on my desk - it helps keep me grounded on the reality of what those "numbers on a screen" really are anytime a trade approaches my risk level and I sense I may be getting stubborn on closing it. 

Use any tips and mental tricks you can to bring yourself back to reality as a trader. Staring at numbers on a screen all day can feel very inconsequential and disconnecting. Reality doesn't set in until the next day when you see your trading account worth significantly less than it was the day before. 

4) I CAN'T LET WINNERS RUN, I ALWAYS TAKE GAINS SO QUICK. WHY. 

Sound like you? There are a number of reasons you do this, almost involuntarily. 99% of traders become so, so focused on the money that they become a slave to it, to the point once they enter the trade, they become completely unaware of the chart and are trading their PnL now. It's the only thing of interest. You spend the entire morning or day scanning and interpreting CHARTS, and now that you're in one, it all goes out the window and the only thing you're interpreting is your PnL. If you're a struggling trader, you probably do this and don't even realize it. 

I wish I had a good answer on a quick fix for this, but there really isn't one. Other than becoming actively aware that you are probably flawed in this area once you enter a trade, and really trying to force yourself to fight it and fix it. You can't be afraid to give up small gains in exchange for potentially bigger ones. If a trade starts to work in your favor, great. Don't panic and just take the .10c gain or whatever if you see more potential in the trade. If the name has 2-3 dollars of range on the day, why are you piking out for a .20-.30c-.40c gain? 

Say XYZ opens at $27 and trends higher all morning about 3 bucks, and you short some at at $30.10, with VWAP down near $29. So you're short here, XYZ starts to get heavy and washes sub 30 to 29.80s, you're up .30c, and you're happy. Most would pike out here probably and take the gains, .30c is a pretty good gain on a trade, right? But bigger picture - why are you covering there? Other than the fact you are trading your PnL. The chart is telling you maybe trend break, $30 whole number break, and still .80c above VWAP at this point after the washout. Why are you covering?? The way I see it would be "Ok I'm up .30c here at 29.80s, but this can go much lower. I'm WILLING to move my stop to breakeven now, with the potential to make more. It's just become a FREE TRADE. Take advantage of it! Say "I'm willing to risk this .30c I'm up, with the potential to make an additional .60-.80+ if I'm right. If XYZ reclaims $30 and I have to close it flat, then fine. It didn't work. Trades don't work all the time, you close it flat or small green/red and it's no problem. BUT if you're right...you're about to make $1+/share on the trade, which would probably make your day.

^ (In a perfect world you want to have a big enough position size that you can take pieces off on washouts & on the way down to pay yourself, but not everyone with small accounts can afford to do that, so that logic above right there really applies to you the most.) 

All of this tie's into the last blog post when I discuss trade management, this is essentially what I mean. To me trade management is exposing yourself to taking more paper cuts than usual in exchange for the potential of much bigger winners. Once you get a free trade (one that immediately works) - take advantage of it. Be willing to risk the little bit you're up with a stop on breakeven, and if you have to close it flat, you have to close it flat. But be willing to take tiny paper cuts over and over by giving yourself the opportunity to catch the bigger move. Just like the lottery - same logic. You can't win if you don't play. You'll never create nice trading gains if you're not in the game and chickening out and piking out every time you see a little but of green on a trade. 

^ This should be used on the majority of trades you're taking, there are exceptions if you're specifically just looking for a quick scalp - then obviously do not do this and protect your gains. That all depends on the specific chart we're talking about. But do your best to judge - if you think you see potential for a bigger move in the chart - give yourself the chance to catch it! Worst that happens is you close flat. 

That's one way to do it. You can meet somewhere in the middle also and use the "Cover half & trailing stop" logic - which I've spoken about in a past post. I also took the specific section of language and copy pasted it below if you missed it. 

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(Language from past post):

I don't set targets for my winning trades, I'm a firm believer in mental trailing stops. Also I don't have my unrealized PnL anywhere on my screen. It's a distraction and will influence you severely, and usually for the worse. If you're trading with the correct size and correct plan, there's no reason to have it on your screen in my opinion. If you find yourself paying attention to that little unrealized number more than you're paying attention to the price action & chart, then you're doing something wrong. 

Trade management is the key. 

Lets use an example stock $XYZ is trading at $11.15/share, and you think you see a trade. It put in a top a few minutes ago at 11.25, and looks to be fading, so you enter short at 11.15. Set your stop about .10-.15c above the HOD. Never set it right at the HOD, because thats a popular spot most set their stops, so should it reach there it will likely squeeze through for a minute as stops get triggered and shake out the weak hands before going in it's true intended direction. Use a bit smaller size than you normally would, and give your stop a little more room above/below that key level that most would stop out at. Thats important. How many times do you get squeezed out of a trade just to learn minutes later that you covered at the top and it would have ended up working out. You're not "unlucky", you just weren't thinking ahead of the crowd - you were one of the crowd, trading your PnL/trading scared like the rest of them. Money or fear should never cause you to close a trade. Hitting your intended, predetermined risk level should be the only thing ever stopping you out or closing the trade. 

So thats the first part. Always set your stops a little above and below key levels depending if you're long or short. Be able to comfortably do this by using smaller size than usual to allow for the extra wiggle room financially. If $XYZ blows through the 11.25 HOD to 11.30-11.40 and begins to consolidate for a few minutes up there and doesn't come back below shortly after the HOD break, then you exit no questions asked. There is no "well let me see what it's going to do, I'll move my stop to 11.53, thats it, no more after that" No. Follow your PLAN, do not adjust it with "hope" that it will reverse. Stop out, take the paper cut and move on. End of discussion. So that covers the worst case scenario, the loss side, now lets go over the winning scenario.

Assume you get short at 11.15 and the trade starts to work in your favor and starts to fade. $XYZ fades down to $11 and you're up .15c or so from your entry. Lock in half of the profit. Now with the remaining 1/2 left on, we're going to use a mental trailing stop. So right after you lock in half, your new risk level on the rest of the position is automatically moved down to your initial entry/break even, so we move to 11.15 as our new stop. Unlike your first risk level, this one is not negotiable nor should there be any wiggle room. We want to ensure we remain profitable on the trade, so at this point, if $XYZ holds 11 and moves back up to 11.15, we're out immediately to assure we don't turn this into a losing trade. 

Lets say it doesn't do that though, and it fades through 11 and heads lower. Your mental trailing stop should be the exact difference between your initial entry and where you locked in the first 1/2 of the position for profits. So we entered $XYZ at $11.15, and we locked in 1/2 at $11. Thats a .15c gain, so thats our mental trailing stop number moving forward. If $XYZ continues lower down to 10.85,  our new risk level is $11. If it washes out to 10.60 next candle, our risk level is now adjusted to 10.75. Moves a little lower to 10.40, our risk is now 10.55. You get the idea. And you will continue to leave this 1/2 of the position on until that .15c buffer is breached, where you'll then stop out on the remaining gains. 

This is an easy way to 1) lock in some profit for a green trade and 2) get the most out of your winner. If you truly nailed the entry, a stock can fade for a long time, so you want to put yourself in the best position possible to get the most you can out of it while still being risk conscious. In this particular example .15c was our buffer, that number is at your discretion based on the particular stock, price, how much range & volatility it has, etc. Like if you're trading NUGT or DWTI or something with multiple dollar intraday ranges, obviously your buffer & initial risk/first cover spot will be larger and position size will be smaller. It's something you've got to play with based on your trading personality, risk tolerance & account size, it will be different for everyone, but that is the general idea. 

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Alright guys, those are a couple of the realizations that helped me start to become profitable, I've got a few others as well which we'll get into & continue next week. 

Hope everyone had a great weekend and happy trading tomorrow. 

Dante