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Month: July 2020

Derive pleasure from following your trading rules, not from profits

One of the most difficult things in trading is associating pain or pleasure with following (or not following) your trading rules, and not from your day-to-day trading results.

Trading results are random. That is a fact.

For example, let’s say you have an edge that results in you being profitable 60% of the time. This means that you will still lose money on 40% of your trades. Beating yourself up for these losses has zero benefit to you as a trader.

We are battling ourselves

The human psyche is fragile. We are battling our egos.

Sometimes in trading we get more concerned about being “right” than making money. This is why we sit on losing positions, hoping they come back in our favor. This is why we don’t take small losses, allowing them to turn into big ones.

I was stuck in a rut, which I’m working towards getting out of. Today has been a step in the right direction for me. Today my focus is on following my trading rules, not make a profit per se. This is really hard to do. Besides, isn’t the goal to make profits after all?

Associate positive feelings with following your trading rules, not the end results

Accepting that a trade is going against you and cutting it should be associated with positive feelings because you cut those losers early.

No one wants to lose money, and that’s why it’s so hard to associate a positive feeling with taking a loss. Taking losses sucks, and we all wish they were avoidable.

It’s difficult to do this. Losing money hurts. But, it’s important to reframe losses as a cost of running your trading business.

I have to remind myself to be impatient with losing trades. I can’t fear cutting a loser too soon. If trade doesn’t feel right and isn’t going the way I expect it to, it’s okay to cut it.

I have to remind myself to not look back at trades that have been cut loose. This look back bias makes me kick myself for not holding a trade longer. This is detrimental to my future trading performance, because I end up holding losers longer that should’ve been cut the moment they no longer felt like good trades.

I have to remind myself that I can always re-enter a trade if an attractive setup presents itself once again.

Dealing with randomness

Establishing a set of trading rules, and sticking to those trading rules has proved to me to result in more profitable trades rather than focusing on profits alone.

If you have a legitimate edge in the market, a set of good trading rules to follow, then profits will follow as result of disciplined trading.

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This week was rough for me

I got my ass kicked this week by the market.

It started early in the week, when I bought WORK and SPCE call options, just before the market reversed course on Monday and sold off in the final hours of the day. Because the SPCE options expired on Friday of the same week, I had no choice to cut this loser. Only to see it rip higher Thursday and Friday.

I started the week in a hole, down $1,100.

I spent the rest of the week trying to climb out of the hole, only to make the situation worse. End result, down $4,000 on the week.

How did this happen?

Getting in a hole sucks. Spending the rest of the time trying to climb out of the hole led me to making sloppy trades, overtrading, and putting on trades that I wouldn’t normally make on SPY and IWM that I told myself were “hedges” in case the market sold again.

I forgot what was working.

I forgot how I made $12,000 in a matter of weeks from May 27th to June 19th.

Nothing seemed to work.

Every trade went against me as soon as I entered it. Or so I thought.

Either way, it doesn’t matter what they did.

What did matter was my mindset sucked. I was in a bad mental state, and desperately tried to “undo” my bad trades from the early part of the week, only to have even more bad trades to “undo”.

I wasn’t doing what works for me.

I started trading options expiring this week. I started day trading more even though I very much prefer swing trading a position for 1-2 weeks.

I cut winners too soon (primarily due to short-dated options being traded).

I let losers run on too long.

I added to losing positions.

I put on positions that were not favorable from the get go.

I spent too much time this week hoping for my positions to go in my favor.

Now is a time for reflection

It’s the weekend. My trading week sucked. But I still live to trade another day.

Goal #1 and always: DON’T LOSE ALL YOUR MONEY. When the money is gone, the game is over.

I’m going to take this weekend to reflect on my trades. I will review past trades further and understand what happened and why it happened. I will try to understand what my mental state was when I entered into those trades.

Trading is hard. It’s hard to tell by all the so-called experts all over social media. They’d have you believe they make profits all day. You rarely see is the hard part of trading. The part where it beats the shit out of you and makes you question why you started in the first place.

I share this for anyone else who had a bad day, week, month, or year. It’s not easy. It’s not supposed to be easy. I knew that. You know that. So take time to reflect, take care of yourself, and objectively review those trades and improve the process. It’s the only thing I know how to do.