A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Everything You Needed to Know About Trading You Learned in Kindergarten (Part 4)
04/23/2009 12:01 am EST
Pat Yourself on the Back
Now let me add an additionally important piece to this plan: Rewarding yourself! Let's see if we can define some important ways that might underline the positive events in your trading days:
- 1. If you are up “X” on a single trade, you will put a profit floor of “X” underneath the current price to protect a portion of those profits.
- 2. If you are up “X” on a single trade, you will take the money and close out the trade.
- 3. If you are up “X” for the day, you will take the rest of the day off, stay away from the trading screens, and do something you enjoy doing—other than trading!
- 4. If you are up “X” for the month, you will put a profit floor of “X” underneath the month's profits to protect a portion of those profits.
- 5. If you are up “X” for the month, you will take the rest of the month off, stay away from the trading screens and do something you enjoy doing—other than trading! Take a vacation, sleep late and read books, or do something else fun!
Trading is hard work! When you get it right, it is important to internally recognize that you did something special.
I can't tell you how many traders have experienced this: At the beginning of the day, they take a position in their normal market. Unexpected news comes out and before they know it, they have three times as much in potential profit in this first trade than they have ever made in a single day! They assume the trade will keep running because of the news and watch as it tops out and begins to turn. Because they have never had parabolic profits from news before, they don't realize that sometimes, what goes up fast comes down just as fast. Before they know it, they find themselves taking some profits out of the trade, but the profit they end up taking is much smaller than their largest profit in a day, and this trade becomes “the big one that got away.”
Stop and think about this for a moment. Had they simply taken the stupendous profit and walked away, it would have been marked in their trading memory for life! Instead, the trade will always be remembered as “I almost...” and be a disappointment, even if they made a good deal of money on the trade.
And if they then go on and make more trades that day, they often turn what had been a career-type trading day into a flat or losing day. They are so stunned and wrung out from the emotional roller coaster ride of the first trade that they are not capable of trading with their normal discipline. This can be an emotional nightmare for a trader, and in many ways, it can cripple their trading career for life!
Let's see if we can fill in some of those numbers, all assuming you are trading a single contract at a time:
- If you are up $1,200 on a single trade, you will put a profit floor of $500 underneath the current price to protect a portion of those profits.
- If you are up $1,800 on a single trade, you will take the money and close out the trade.
- If you are up $2,500 for the day, you will take the rest of the day off, stay away from the trading screens, and do something you enjoy doing—other than trading!
- If you are up $15,000 for the month, you will put a profit floor of $5,000 underneath the month's profits to protect a portion of those profits.
- If you are up $20,000 for the month, you will take the rest of the month off, stay away from the trading screens, and do something you enjoy doing—other than trading! Take a vacation, sleep late and read books, or do something else fun!
I based these numbers on a trader with an average winning trade of $500 per contract, a 50% win/loss ratio, and again, this trader always trades only one contract at a time. The size of the numbers you come up with may be radically different than what I just wrote down. They are only meant as a starting point for your mental exercise! It should take you several weeks of soul searching before you finalize your first set of hard and fast rules, but you should have a set of rules written down and on your trading desk where you can see them at all times. You should also always fill out a trade plan before you enter any trade, and stick to your trade plan without fail! As I noted before, if you violate any of the trading rules, make yourself take a break. If you love trading, having to be away from it should feel terrible! You will avoid being put in the penalty box at all costs!
This trader wasn't in my mentoring program, but he conversed with me via e-mail daily, and often enough that when a day went by when I didn't get an e-mail from him, I would wonder if he had hit a tough streak or if he had taken a day off. After he had one rough stretch, I e-mailed him and spelled out the set of rules I suggest to the traders I mentor. He thanked me for them, told me he thought they were a great idea, and never mentioned them again.
I lost a trader today. It saddens me to think that I was unable to help him overcome his own internal flaws. I truly did my best to help him, but it wasn't enough. One thing I tell people in my free Webcasts, on my Web sites, and in my mentoring programs is this: Your birth certificate does not say “Trader” on it. If you want to be a consistently successful trader, you have to learn a good deal about the markets and about trading tools, but mostly, you have to learn a great deal about yourself!
I wish you all good trading.
"Master your tools, Master Yourself."®
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