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Keeping Stupid at Bay – Making Trading Decisions That Matter.
There is a common and all too painfully true cliche that most Americans spend more time planning their vacations than their retirement. We simply focus on the wrong things and then wonder how did we screw up our life so badly.
Yesterday, I had my own vacation-to- retirement moment and it slapped me into stone cold sober into a becoming a much more serious trader.
Every Wednesday I have to pull myself from the desk to run over to 30 Rock to do a couple of hours of hits for CNBC. I always take the subway, because no real New Yorker would be dumb enough to get caught in midtown traffic. But NYC subway has been a disaster lately. The system is a victim of its own success as ridership is at all time highs, while capital spending has lagged for a decade. This results in track fires, train delays and produces a never ending cat and mouse game between commuters and the system.
Although, I am only 20 minutes away from the studio the trip can take an hour because I have to time the trains, brave the tourists and get through NBC security. I’ve developed all sorts of shortcuts from using the MTA app, to following the employee paths around the former Time-Life buildings in order to avoid the sidewalk hogging tourists, to getting to know all the NBC security personnel by name so I can jump the line every time I am there. All of these elaborate logistics are in place because I CANNOT AFFORD TO FAIL. I can’t be late to the studio because we shoot live. In ten years of doing this, I only missed one hit when the subway train just stopped dead in its tracks and trapped me. If this was trading you could say I’ve only had one losing trade.
But here is the interesting thing.
Yesterday I realized that I actually spend more time and care on my weekly trip to 30 Rock than I do on my trading plan and I bet many of you are guilty of the same crime.
Ask yourself a simple question.
Why am I in this trade right now?
Because price was running and I wanted to get in.
Because the markets haven’t moved for hours and I am bored.
Because I just lost money and I want it back
Because I am right.
If you answered yes to any of those questions -- you are not trading to plan. None of those answers are in any legitimate trading plan ever. Worse, even if you answered no to all those questions, but still took a trade that sort of, kind of, close to your setup -- you are still not trading to plan.
The only way to trade to plan is
Of your strategy
So if you want to start taking your trading more seriously than your commute make sure you answer these three simple questions every time before you hit send.
What is my opening trade size? I trade at 1X leverage -- never more. That alone has saved me from a whole lot of stupid because no matter how many rules I broke I could only do so much damage to my account. Conversely, if you trade with high leverage and do 99% of things right you can still lose all your money when the market forces a margin call.
What are my trading rules and is THIS trade I am about to take meeting each and every of them? If the answer is no -- then you are not trading -- you are goofing off.
What is my maximum loss in actual, real dollars (or pounds, or yen or francs)? Percentage means nothing. It’s an abstract mathematical concept that you will quickly ignore at the first sign of heat in the market. But tell yourself -- I WILL NOT LOSE MORE THAT $500 on any given TRADE EVER -- and see how much more effective your risk control will become. Money is real. Percent is not.
That’s it. Just those three simple questions will separate you from the vast majority of your fellow traders you will start making real business decisions that matter.