An Open Letter to Aspiring Traders: What You're Actually Getting Into & How to Prevail

The beginning stages of this game are brutal. You’re going to be horrible at it. You're going to feel stupid. You’re going to put in endless hours of work, and you’re still going to lose money and make the same mistakes over and over again.

In just about anything else when you are learning…if you put in lots of hard work, you’ll get better at said task at a rate of time relative to the amount of work you put in. The harder you work, the faster you'll get better. Trading is not one of those things, so don’t burn yourself out at the beginning of your journey staying up until 3am every night thinking the answer to all your problems is "I just need to study harder" or it's in some book or DVD or online. It’s not. You just need screen time & experience. 

There are ups and downs. In the beginning, more downs than ups. There will be moments of clarity early on when you're going to feel like you’ve “turned the corner and finally figured it out”…….you haven’t. Don’t get cocky and try to rush the process. You’ll be knocked down to your knees more times than you’ll care to count with that attitude...remain humble. 

90% of you will quit. And believe me…you’ll be very, very tempted to be one of them. But don’t.

If you are lucky enough to make it, this is literally a dream job. You have no boss. No hours. No agenda. No dress code. No meetings. No lazy difficult coworkers. No rush hour traffic. Endless motivation. At a normal salary job, no matter how hard you work, your paycheck at the end of the week is still the same. How is that supposed to keep you motivated and hungry to improve yourself? In our profession once you're consistent, the harder you work, the more your paycheck is. Talk about a reason to get up in the morning. Complete and utter freedom in every sense of the word. You can work from anywhere. Travel the world. All you need is a laptop and a Wi-Fi connection…the entire world is your office.

               Do you want that?

Of course you do. But there are some very important things you need to understand up front. 

What is day trading for the independent retail trader like you and I?

A very, very difficult uphill battle. As a retail trader, you're going up against some of the most intelligent businessmen & computerized algorithmic systems in the world. They have more money than you, more experience than you, more resources, more contacts, better software, faster executions, less emotions, and one simple, ruthless agenda: to take your money. Thats what this all boils down to, everyone is friends on social media, messing around and joking, but at the end of the day you have no friends - everyone is fighting to take each others money.  You're deeply, deeply in the hole before you even begin as a new trader. Therefore, you need to hone in on your advantages and be on a relentless pursuit to utilize them as often and as efficiently as you can. 

Your main advantage as a retail trader against computers, institutions and other traders is discretion.  Just as when you're in a casino, your only advantage against the house is your ability to walk away when you're up, they can't force you to play - that's your prerogative - discretion. Your ability to discern and evaluate your trade at any point in time, and make a proper decision to remain in or cut your loss quick instead of sticking around and getting eaten alive. Another way to put that is your ability to manage risk. It's the sole thing that will keep you in the game, and your cornerstone to success as a trader. 

If your aim coming into this is to see immediate success, striving for perfection and turning a large majority of your trades into winners - you're going to have a very bad experience. Probably about half the time, you're going to be incorrect on your trades, and that's fine. You need to accept this. If you get involved in a trade that starts to go against you and your first reaction is to get annoyed and fight it, averaging up/down trying to "trade" your way out of it - you're also going to have a very bad experience. There are times at a later stage in your trading career when you've got a more mature understanding of the game and more money that you can pick and choose your battles and fight sometimes. But as an aspiring new trader just trying to survive & build capital, theres just no room for that. None. The sooner you realize you have zero control over price action & market movement, the sooner you'll be able to drop the ego and stop fighting & getting "stuck" in trades. 

You've got to come to the market every day with the mentality "I am going to trade well today", not "I am going to make money today." You need to be aligned with the frame of mind supporting "I'm going to trade well, focus on good entries, and if the market wants to pay me, great, and if not, thats OK too. I know I can't force it to pay me, and it can be very unforgiving if I try."

Something I see all too often is guys coming to me saying they trade really well for a period of time, and then then have this one bad stretch or one bad trade that wipes everything away. "I have a good amount of winning trades but my losers are always way bigger than my winners." Is that something you identify with? As soon as I hear this story, I know exactly how this person operates mentally without having to see them place a single trade. These traders "trade their PnL" instead of trading the chart and the plan. They are far too focused on the money, leading them to be impatient with their winners, and far too patient with their losers. It's kind of ironic we hold onto losers out of a fear of losing, isn't it? Sounds pretty stupid when you put it that way, but it's true. This stems back to basic human psychology and the fact that we don't want to lose. We don't. It's ingrained in our DNA. Nobody wants to lose. Everyone has an ego and thinks they know more than they do, that they're different, etc. And as soon as a trade goes against us, our first instinct is to take it personally and develop a vendetta mindset moving forward in that trade - we just don't want to accept the loss. This is something you'll battle from your very first trade to your last. Little do most know and unfortunately usually find out the hard way, is that this approach only leads to the losses growing larger. After a string of bad losers, you go on the defensive - and any time you enter a winning trade after that, you're quick to take profits and minimize the gains ("ugh finally...a winner"), and that mindset is the beginning of a long painful journey of unsuccessful trading and slowly bleeding your account down to nothing. If this describes you, you are not alone. You're actually very much in the majority. 

So how do you fix it? 

The way to fix it is quite simple. It's to develop a plan for EVERY trade, and do not deviate. If you're trading a small account and trying to grow it, this applies to you the most as you have no room for failure. You absolutely HAVE to do this. Let me give you an example of the way I like to do it. 

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. 

I'm getting a bit long winded here so I'll wrap it up, but thats just one example of a type of plan I like to use to try and get the most out of a trade, there are plenty of other variations - get creative with it, but the one CONSTANT in all of this is you need to have a plan, and you need to follow it without fail. I'm sure thats something you've heard often "yeah I know that yada yada...", but it truly is the key to achieving consistent success from where I'm sitting. Most do not do this. Stopping out when planned to keep your losses small, and using trailing mental stops on your winners to get the most out of them. That is the best way to grow an account. Not maxing out margin, trading above your means and hoping to hit some home runs. 

Challenge yourself. Say "Today I'm going to create smart, risk conscious plans for every trade, and follow them without deviation. No matter what." And then do it. 

Dante