The Perfectionist Trader

First just wanted to say thanks to everyone who DM'd me blog topics - I've written them all down & will be answering all questions in a future post - todays post will be a more generalized topic of something I've wanted to discuss for a while, and was reminded of the other day by one of the traders in my group. I'm thinking of compiling topic suggestions for a little while and turning it into a bit of a Q&A style post soon - so if you've got anything you want me to discuss - send it over! Tweet at me or DM is fine, can e-mail as well dvg3289@gmail.com.

This post today is for anyone who trades on a daily basis.

Perfectionism & how it relates to a day trader. I got this idea from one of my traders last week. It was from a guy whom I've been trading side by side with for about 8 months now & speak to daily, and who I know for a fact to be a knowledgable and solid trader. After a very good month followed by a rough few days, he sent me a message and said to me "Dante, I had a few moments over the weekend where I started to doubt if I actually knew how to trade or not. If the last month was just luck maybe." And I immediately squashed that bug with a few comments in reply. I wanted to elaborate on those here today for anyone who may be doubting themselves or their abilities as a trader and judging themselves by win rate, current profit margin, or any other numerical statistic like that that may be lower than you'd like.

My initial advice regarding a focus on numbers to you is this: Stop. You'll drive yourself nuts looking for the "golden strategy" that yields a never ending supply of consistent winning trades. You are chasing a unicorn.  Strategies need constant updating and revision, as the market too is always changing. Just as the market cycles through phases, so will your trading profitability and performance. It's natural, it happens to everyone, and it's part of the game. Accept that now, and don't get discouraged in the "correction" periods of your journey, just as you should not get too high during the good times.

"Never let success get to your head, and never let failure get to your heart."

One of the biggest focuses I see people worrying about is win rate. They want to have a super high win rate, they think the only way to build their small account is to be profitable on an extremely high number of trades in order to grow. This in turn causes them to fight with losing trades, in an effort to create more winners, since they (incorrectly) think that is the answer to success. It's NOT true. It's just not, plain and simple. So if you're focus is on "Oh I have this system thats supposed to yield a 70% win rate but I'm only winning 37%, whats wrong with this or that, how I can bring it up or do this better, cut that out, trade more, trade less" etc etc etc - my head spins when I hear people come to me with that stuff. Trading is simple. Don't overcomplicate things, or you'll go down a  never ending black hole of nothingness until you eventually get overwhelmed & discouraged and quit. 

If you find you're a numbers person like that & drive yourself mad worrying about your stats - I encourage you to take a step back and just relax. Stats are good to know - they help guide you to know WHAT to trade, which I talk about here - but don't make them the end all be all of determining your ability as a trader or let them discourage you. You can make plenty of money as a day trader by being right only 50% of the time - or LESS even if you are managing your trades correctly. I'll give you two examples quickly.

1) The other day I had traded 3 names in the morning, all three of them were green for a period of time, and they all reversed on me, patience didn't pay. Fine, whatever. Happens. I had adjusted to breakeven stops on them all once they went green, and ended up cutting all three for small losses, so after the morning session I was about -350 on the day & 0/3, and as far as I was concerned, I traded GREAT.  Yes, I said I finished 0/3 on the morning with 3 red trades for -350 PnL, and I traded great. Huh? Some would call that an extremely frustrating morning, saying "oh I always have patience at the wrong time, nothing ever works out for me" and think negatively on it - OR you can see the positive side and say "Well I did everything according to plan and took no major losses. I had plans for all of those trades, none panned out, they reversed to flat/small red, and I cut them all for tiny losses. No problem. No stubborn adds, no blowups, just trades that didn't work. I can't force the market to pay me, I'll wait for the next one." Then STMP came along, I got a nice short on, let it work and closed that one +1900 or so, and I was done for the day. (I thought I saved the PnL for that day but I guess not - I can't find it.) But the point is a 25% win rate led me to a +1500 day. You can extrapolate that up or down to suit your trading size - but ultimately on a percentage basis it holds true for any trader of any account size.  If you are effectively managing your trades, you don't need to win a ton of them to make money. I can't stress that enough. So next time you get stubborn & start adding to a loser, remember that thought. Say "Well if I only need to win on half of my trades roughly or sometimes even less in order to make money...why am I about to fight this one?" If you've got a good answer to that, I'd love to hear it. You only need a few good trades a day to make your pay. Sometimes even just one.

The day you decide you're here to make money and not here because it's exciting and you like the rush and hope to hit it big, is the day you will start to make money.


2) I was doing an experiment in April where I recorded my PnL for every day and posted it. I finished the month +30K and I believe my win rate on all names was around 55%. You can calculate it out for yourself if you want the exact %win rate I forget it, but here are the links to my PnL for every day in April. 

http://dgtrading101.blogspot.com/2016/04/april-pnl-recap-week-2.html
http://dgtrading101.blogspot.com/2016/04/april-pnl-recap-week-3.html
http://dgtrading101.blogspot.com/2016/04/april-pnl-recap-week-4-forward-looking.html

So for being wrong about half the time in the entirety of April...I was able to close the month green at +30K, one of my best months to date. So I say it again...the next time you're fighting with a loser, try to remember that its OKAY to have the losers. Cut them QUICK and remember that you can be wrong fairly often, and still build a trading account. It is so important to understand that, and to take the pressure off yourself to turn everything into a winning trade. You don't need to be perfect and have a 90% win rate to be successful like most new guys think. All that does is influence you to try and force red trades to become green - and if you've ever done any trading at all, you know how that story ends.



"Perfect." Let's harp on that word for a little while, and rewind back to the title of this post: The Perfectionist Trader.

The perfectionist trader is a losing trader. He's a (or she's a, of course) trader who will struggle mightily, forever. He will have grey hair by 40 from stress, he'll constantly be complaining and never be happy or satisfied with his work or results and he'll never grow. If you are a perfectionist, then you need to focus your perfectionist energy on becoming the polar opposite of one. There is no place for that mindset in trading, you have to strive to become perfectly imperfect.

Two quotes on this topic I really like from Mark Minervini:

"We are not born natural traders; to the contrary... to become great you must learn to make unnatural responses become axiomatic and natural."

"As a stock trader, when you strip off what feels natural and learn to do what feels unnatural, you become supernatural"

I run into this a lot...anytime I'm talking with a new trader, I notice very similar characteristics they all seem to have. Chances are if you've been drawn to day trading, you're already a unique personality type individual to begin with. You've probably got a very entrepreneurial mindset & motive, which is great. You need that. However, along with the drive and passion of an entrepreneur comes a relenting pursuit of perfection....lets focus on that one. I hear so often "I'm a perfectionist...I just want everything I do to be perfect, to do it to the best of my ability, I won't stop until my trading is flawless." Is this something you've said or thought about yourself before? Probably. Well.....un-think it. Holding yourself to those standards will be your demise.

"Practice does NOT make perfect; only perfect practice makes perfect. If you're practicing wrong, all you're doing is engraining bad habits." - Mark Minervini

Lets think about this logically for a minute and from a different angle perhaps. So your goal is to achieve perfection in trading. Fine. Now, as a retail trader, you have ZERO influence on price action and market direction. Zero. Well, as close to zero as possible, an extremely insignificant amount 99.9% of the time, we'll say. So it is safe to state that to us as retail traders, price action is an uncontrollable variable. Fair? Ok. Then: If you aim for perfection or close to it in your trading, you are telling me you are aiming to control the uncontrollable? I hope you have some special superpower you didn't tell us about, otherwise you're up a creek without a paddle. It's like saying "I know it's going to be sunny tomorrow, I'd bet on it." so you take the Vegas odds on Sunny, and then it's cloudy and rains, and you get annoyed and blame yourself and call yourself a failure. Does that make any sense? Does the weather that day really have any bearing on you or your skill level whatsoever in that situation? Of course not.
So lets tie this back into the win rate people: "I need %XX win rate to make money and be successful." You have NO control over whether or not the market pays you on any given day. None. All you can do is put yourself in high probability situations and hope to get paid, otherwise cut it and run away quickly "when it rains."

Do you see it differently now, and why I feel focusing on that stuff becomes an insignificant matter in the end?

You know the saying "All is fair in love and war"? Well it should be "All is fair in love and war...and trading." You can trade well all day, and still lose money. You can trade very poorly, and make money. You just never know what you're getting yourself into on ANY given trade..especially if you like to trade the high volatility momentum stocks like I do. You never know who's on the other side, and with what kind of bankroll. Respect them, run away from them when it's cloudy and rainy, and stick around to soak them in when it's sunny.

Don't worry about your win rate, and don't try to control uncontrollable variables....for obvious reasons. Just trade well. The rest will take care of itself.

Quickly back to the very beginning of the post when my buddy was questioning whether his really good month he just had was luck. My answer to him was Yes. Of course there is luck involved in trading to an extent, right place right time kind of deal. If the market decides to pay you on any given day, be grateful, and feel lucky! Many others could not say the same that day. While there is a luck component in trading, it's obviously not all luck - I'm just being blunt here to make a point. But anyone who tells you they've completely "mastered" trading - is telling you they've found a way to control the uncontrollable. Don't believe them.

Trading to me is not about win rate, but about your ability to consistently put yourself in high probability situations to get "lucky", and the ability to run away when that thesis is voided. 

The "ability to consistently put yourself in high probability situations" part of that statement is where the skill factor comes in which is an entirely different discussion, but at the end of the day, even once you're there, you're still not home free! The market still has to pay you...and you still have to get "lucky" or "fortunate" we'll call it, in the end. You've done all the preparation and execution you can by this point - the rest is out of your control. So if it goes red..don't try to CONTROL it and turn it green, just react and cut it like you're supposed to. Price action is never wrong & reigns supreme - not your ego.



Some closing thoughts:

In my experience, 99% of trading success is just learning how to stay out of trouble. It really is. Thats another way of saying Risk Management reigns supreme. 

And I truly do believe that. People so often try to overcomplicate a game that inherently is not very complicated at all when you break it down to the core aspects that separate successful day traders from unsuccessful ones. Everybody knows what support and resistance areas looks like, what a trend line is, what a double bottom or head and shoulders pattern looks like, etc...it's not very difficult to understand the basic technicals of a stock chart. The difficult part comes in on the mental side, which I believe is FAR more important, and very under appreciated and overlooked. Everybody is focused on "studying" and setups and so on, when in reality they should probably be studying themselves and reading about trading psychology instead and the weak links in their mental game, which are highly likely the root cause of whatever issue is holding them back from success and profitability.

I hope this puts some trading struggles into perspective & how to start combating them - if you're thinking "I can't do this" or "I'm not a good enough trader," you're wrong...there's just a gap in your mental game and your ability to consistently avoid blow ups and bad trades. My next blog post is going to focus more specifically on those common "gaps" in a traders mental game that cause issues, figuring out which ones you have, and how to fix them - so keep an eye out for that.

As always, feel free to contact me at dvg3289@gmail.com with any quick general trading questions
or broker questions. I've used IB, E-Trade, SpeedTrader & SureTrader, and I am familiar with 
CenterPoint, TradeStation and TD/ToS. Outside of those, I probably won't be able to answer your question. 

Hope everybody had a great weekend!

See you out there.

Dante








Comments

  1. Just plain awesome. I'm looking forward to the next post. Thanks

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