The Only Thing You Need to Do To Make Money Day Trading Next Year
This week I was going to do the typical end of the the year what-have-I-learned-in-2015 column and talk about volatility regimes, implied bets and exit and entry strategies. Yadda, yadda, yadda.
Then I stumbled across an old thread on Elite Trader called (SIC) What`s your biggest tradeing blunder? and suddenly realized that it contained the answer to the key day trading problem that plagues us all. The thread like so many on Elite is an endless litany of missed analysis, sloppy execution and terrible decision making at key points in the trade. Reading it was like watching a slow motion car wreck you know it’s wrong but you just can’t pull away.
Tolstoy once said that every happy family is the same, but each unhappy family is unique in its own misery. When it comes to trading I think the exact opposite is true. Every happy trader is different but every unhappy trader is depressingly the same. What unites every losing day trader including those in the Elite thread is the woefully misguided attempt to make every win the same size, while making every loss different.
It stems I think from our almost subconscious need for a “paycheck”. Paychecks are of course uniform. They are cut on a weekly or biweekly basis and lull us into the belief that money like lightbulbs, cereal and soap comes in nice uniform units of measure.
But in trading to think this way is pure madness. The markets are never uniform and never provide predictable profits.
Imagine, however, if we smashed this mental model to smithereens and instead did the exact opposite of what every retail trader does. Imagine if we accepted the fact that our wins would be all over the place sometimes banking as little as half pip, sometimes making 20 or even 50 pips per trade. And then suppose that we made a vow in 2016 that no matter what, no matter how, no matter why, our losses would always be the same size.
Last week I talked about the need for a money stop. For a typical $10,000 retail trading account I think a $100 money stop per trade is just right. So suppose that in 2016 you made it your business to never lose more $100.00 on any trade you made. It didn’t matter if you were right or wrong. It didn’t matter if this was a planned trade or simply a stupid fat finger execution. It didn’t even matter if this was your fifth, sixth, seventh loser in a row. The only thing that mattered is that you never lost more that $100 on any given trade idea. I guarantee that if you did that there is almost no way that you will fail as a daytrader. You may not be profitable but you will NOT lose all your capital.
So in 2016 we can talk about tactics til kingdom come, but the only thing we really need to do is keep our all our losses at the same size ALWAYS and if we can just do that we will be well on our way to making money next year.