Friday, April 15, 2005

Such a familiar story

I received the following email from a fellow trader and it’s really difficult to give any kind of advice here. But let me quote the mail in parts first.

I've only busted my account one time previously. Until today, when I busted it the second time (been doing CCI maybe for 1-1.5 years).
I just gotta tell you the trade, because I'm sure you will be familiar with how it goes. My account was at about $2050 when I entered the trade. I had had a really lousy day. Turning a 150 buck winning day into a break-even day. I should have stopped right there, with bells going off. But no, I had to get it back. With the ER tanking the whole day I, like a total brainless fool, was looking for a bounce.
So with about 1 hour trading remaining I went long the ER on what looked like a ghost (counter trend trade, real bright with the OBVIOUS trend being down the whole day). I think it went my way for like 1 tick. I made my stop wider (mistake no 1) cause I needed a winner and it was going to bounce. So it went my way 1 tick and then IMMIDIATELY dropped 10 ticks in like 2 seconds.
So now I'm sitting with an account value of 1950 (below minumum margin for futures on IB), and a losing trade on the board. What to do?
Mistake number 2: go for broke. Widen the stop even more. I just knew it was going to bounce. Just get me out break even and I promise to never do it again. Went into total pray mode, and watched it tank another 30 ticks into the close...
Ffffuu"#¤"%!"#..Time to pack the bags....
So now here comes the question for you. Because I found the following text on one of your entries:
"Btw: The reason, why I remaind for 2 years in the 2-3k range was simple: I was an undercapitalized novice daytrader, who had had huge swing trading losses. I could not afford a single loss and that means you get a lot of these. It.s just the way it is. But for me it meant healing from prior huge losses, it meant learning, what it meant to be a daytrader, it meant learning the necessary skills to survive."

This just sounds so much exactly like me it's uncanny. All I do is trade with 2-3k in my account. I can't afford more than that. And even that is stretching it.
So my question is this: Is this a good way to do it? Am I making it unnecessarily hard for myself? Since you already went through this thing once I was thinking you could tell me if it's really worth see-sawing the account month after month with the 1 contract trades, and staring at the account value like a scared rabbit afraid it'll go bust again at the smallest mistake.
I mean should I just load up the account with all I have (admittedly not much) and trade 1 contract hopefully being less afraid of busting out?
I'm just thinking maybe this stuff is not for me..oh the pain the pain is just unbearable. I was already starting to think I could make it. I was even able to do proper money management, and I have seen the light on what MM means. But yet when I go from sim to live my brain seems to just short circuit. Sigh..oh well..back to the drawing board”

It's the Journey not the Path...

Let me start with the above Journey of a Trader. It’s a description of the different ways we chose to follow. All might eventually lead to the golden valley we all seek, but for some it’s a meandering leisure like way, for others it’s a stony hard road.

Reading your experience, I will first tell you, what 99% of all traders will tell you:

  • Stop trading immediatly
  • Read Tack’s article about Trust
  • Develop a sound trade and money management plan
  • Sim trade until you have 4 green weeks in a row trading your plan
  • Get yourself a trading account which will allow for a few losses before you go bust. As I have written in another article trading with 5k – 10k per contract is a safe way to go.
  • Start trading 1–2 contracts real. If the first week is red go back to the drawing board and simtrade until profitable

And this advise is correct for 95% of all novice and struggling traders.

Beware of the stony hill road

But if you already took it, if you can’t simtrade like you trade real, because you never do the dumb things in simtrading , which you do once real money is on the line, then you have 2 choices

1. Stop it right now, trading is not the right business for you. And again 95% of all traders on this stony road should heed this advice. Stop it before you are forced out. There is no Ego involved. You’r not a loser, just because you can’t make it in trading. It’s just a fact, that not everyone is a born trader. And if you can admit it before all your funds are used up, I draw my hat. You sure made the right decision.

2. Continue reading, but be aware, that this is just the way which helped me. I can show it to you, but you have to decide whether it fits you or not.

  • Stop trading and think about the reasons, why you want to become a trader. If you just come up with the money as reason to trade, forget it. You already know, that it isn’t as easy as they all claim it to be.
  • Sit down and think about your trading plan. Do you really know when to take a trade and when to stay out? I don’t care what system you want to trade. Just make sure, you know what you see on the chart, what represents a signal and then be prepared to trade on the signal. Try to define your trade rules as exactly as possible. Look at your charts. Remove anything, which is not necessary to trade your plan. So if it’s not in the rules, it has no place on your charts. Simple as that. Think twice about the indicators on your chart. What do they represent, what do they measure? It makes no sense to have redundant information on the chart, as it will just fill your chart and provide false security. Also try to limit yourself to a maximum of 7 lines, indicators or other information on the chart.
  • Think about your Moneymanagement. What times of the day do you want to trade. What contracts can you afford to trade. Is it allowed to trade news events? Do you set yourself a daily goal and if reached, do you continue trading? If you are green in the morning, do you continue in the afternoon, or are you content with what you got? If you give it back, do you stop before it gets a red day? Just formulate the rules and be sure you don’t violate or redefine  them, once you have a trade open.
  • Open 2 accounts: One account is your trading account and you put 2.500US$ into it. The other is your bank, the account where you put in your tuition money. 5.000 US$ should be sufficient to get you going for 2 years, but that’s upto you. I’m setting you up to trade with the back at the cliff. One wrong step and you’r out of the game. But I’m not setting you up to trade with scared money. Your education to become a trader will cost you money. But different from other schools you visit, here you decide yourself, what you are willing to pay. The market will teach you harsh lessons and it will be a long time before it is content to demand the emotional payment only.
  • Start Sim-trading your plan until you know it in and out. 2 to 4 green weeks 8 hours a day should give you the security, that you know, what your charts are telling you. If you change your charts during this time or thereafter, you are allowed to remove things, you identify as clutter, as unneccessary for the plan. But you don’t add new things! Don’t tell me, you have to make money now, you have to trade for real. The markets will be here tomorrow and in 4 weeks. But you won’t unless you give yourself the time to learn your plan.
  • Once you are green in Sim start trading 1 contract. You have to earn the right to trade more than 1 contract, so don’t think about trading 2 contracts. You have emotional problems, which need to be addressed one at a time, while trading real. Moving your Stop to avoid a loss is just one example. Taking early profits is something a lot more damaging to your account as most Daytraders will have 50%+ winning trades, about 20%+ trades at breakeven (+ 1 tick I hope) and less than 30% losing trades.
  • Keep a trading journal, where you make notes about every trade you take. Grade yourself, write emotions down you have in the trade. Follow the trade after you closed it. Keep notes to be able to calculate how much of the total move you were able to grasp. 40% is fine, 50% of the whole move is really great. But if it’s just 10% on average you need to look at your trading plan and your exit rules again.
  • There is a saying: Take care of your losers, the winners will take care of themself. But that’s just not correct. Take care of your losers is sure correct, but you need to take care of your winners as well. You need to develop the right mindset to hold onto a winner as long as possible . You need to squeeze them and get every single tick. But never ever let a winner turn into a loser, it’s desastrous on your mindset. So move the Stop to BE+1 as soon as acceptable, meaning as soon as you are out of the wiggle range. But then give it time. A trade needs time to develop. Look at your charts. How much time do the good trades need to go the whole range of the move. If it’s 7 bars on a 3min chart, that’s 21 minutes! If you look at a 15min chart and it usually moves 5 bars to the top, that’s already 75 minutes.
  • Once you bust your account, you stop trading immediatly. You are not allowed to trade back.  The next day you access your tuition account and fill up your trading account to 2.300$. This will allow you to trade, your first trade doesn’t need to be a winner, so make sure it is. But before you plunge in again, think about your trading error. What caused it, why were you not able to avoid it. Did you act on a valid signal and it just turned out to be one of the 30% failing signals or was it caused by an emotional problem, which needs to be addressed. Depending on the trading error which caused you to go bust, you continue real trading or it’s back to sim trading until you get it green again.
  • You will find yourself in a range between 2k and 3k for as long as it takes you to get over your emotional problems in trading. Trading is a mind game, and the market is setup to get you out of your trade at a loss. Simple as that. So, unless you are able to develop the right mindset, you will lose.

I’m sure you will feel bad accessing your tuition account. And you will do a lot to avoid this feeling in the future. I can tell you for me it worked, after 4 or 5 times, but I was a real hard nut to crack. And still this whole period of 2 years has cost me just 10% of what I paid the market before I decided enough is enough, before I found a way to force myself to honor every single US Dollar I was able to squeeze out of the market. Before I knew a 10 tick stop on ER2 can mean the difference between being able to continue trading the next day or waiting one week until I had transferred funds from germany into my trading account.

See yourself as a stock currently going down, building a bottom, becoming waterlogged and ranging for as long as it takes to unlearn all the things you did wrong and which caused the downslide, learn the things necessary to really trade, until finally you see yourself going up again, reaching the 3k top and breaking it to the upside.

The way worked for me. There is no guarantee it will work for you. But being busted is a time to reconsider, to change something or to stop alltogether.

If you decide to continue on your journey,

Relaxed trading to you