Like fishermen, day traders love to talk about the “big catch” – the trade where the moons, stars and planets aligned in perfect unison and we made more in one hour as a day trader than we’d make all month in our prior career. Yet, while these stories are often entertaining (if not completely accurate), they shed very little light on what it requires to be truly successful as a day trader.
The simple truth of the matter is that the real key to successful day trading is not making huge profits. The key is to avoid big losses. After all, one or two really bad days could wipe out your profits from 3-4 weeks of good trading. Furthermore, losses keep you from making money in the future. The less capital you have to work with, the less you will have available for trading. Therefore, if you are going to be successful as a day trader, then you must preserve your capital base.
One way to preserve your capital base is to get into the habit of quitting while you’re behind. Now, I know that such a sentiment is almost un-American. Yet, the sad truth is that many day traders are successful 4 out of every 5 days, but they lose more in the one bad day than they make in the four good days combined because they don’t know when to walk away. They can’t seem to leave bad enough alone.
They have a hard time accepting that everyday isn’t going to be profitable. They think, “Hey, I have a sound system that worked yesterday. It should work today as well.” And that would be true if it weren’t for the pesky fact that you are human and you are acting in a market filled with similarly imperfect creatures. People make mistakes and act in unpredictable ways; and so do you. As a result, there are going to be days in which you can’t seem to do anything right.
This is the nature of day trading and it’s the nature of life as well. In every profession, people have their good days and bad days. We see it all the time in the world of sports. A basketball player will score 50 points one night and come back the next night and score 10. The same thing happens for writers and artists. Some days, they are filled with inspiration and the ideas just flow out of them. Other days, they sit all day in front of a blank piece of paper or a blank canvas. It’s just the way life works.
The key is to not do so much damage on your bad days that you destroy your good days in the process. The way to prevent this from happening is to set daily loss limits. For example, you could set a daily loss limit of $200. Whenever you’ve lost this amount of money, you call it quits and go take a nap (or whatever).
Also, I recommend establishing a maximum of three losing trades in any single day. It’s like a “three strike” rule. Even if the total combined losses are less than your daily limit, you should quit trading. You simply don’t “have it” that day. Consider yourself lucky that you didn’t lose more and resolve to fight another day.
Now, you might be thinking, “What will be so different about tomorrow?” The answer is you. For one, with some time to get over your disappointment about the last trade that didn’t go your way (and to hopefully learn from your mistake), you are less likely to do something rash out of frustration. For a day trader, frustration can be just as deadly a sin as greed.
Over the years, I’ve seen many traders who couldn’t keep their tempers under control and the results ranged from comical to tragic. We had one trader who would yell and scream whenever a trade went sideways on him. Sometimes, he would even punch his keyboard. I can’t tell you the number of keyboards we had to replace for him. That is, until the day that he broke his arm by slamming it into a keyboard. He learned a painful (and amusing) lesson about controlling his temper. Other traders weren’t so lucky. They kept stewing and boiling over bad trades until they developed far more serious health complications.
The financial costs of trading while in the throws of frustration are even more immediate. You are more likely to do something rash in an attempt to “get even.” Dollar cost averaging is an example of this type of behavior. Also, you may be tempted to trade a stock that was successful for you yesterday even though the fundamentals no longer support trading it today. Or you might do something completely out of character in the heat of the moment. One way to avoid this danger is to set strict loss limits and stick to them.
Of course, this is easier said than done. Yet, as I’ve said many times before, you can’t master the discipline of day trading without discipline. You must develop the will to get up from your computer whenever every fiber of your being is saying, “Just one more trade! Come on. Those last three trades were just bad luck. You can’t have bad bad luck forever!"
And that voice is right. You can’t have bad luck forever. Yet, you can have plenty more bad luck today. In fact, you will almost certainly create your own “bad luck” by continuing to trade on a day when you just don’t have it.
Therefore, when those days arise (and trust me, they will), use it as an opportunity to explore other interests. Take a sketch pad into the park and draw the leaves. Or go for a run or a bike ride. Or just take the opportunity to take the kids to the ice cream parlor or a matinee. In other words, get away from your computer and make the best of your In the long run, you will not only be a much happier and healthier person, but you will be a much more successful day trader. In the immortal words of W. C. Fields, “If at first you don’t succeed, try again. Then quit. There’s no use being a damn fool about it.”
Fausto Pugliese is the founder and president of Cyber Trading University, a world leader in online education and training for traders and investors in the markets. You can reach Fausto at [email protected] or follow him on Twitter and Facebook.
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