There
are thousands of day traders out there in stock market land. The good
news is that day traders can make great profits in these volatile markets.
The bad news is that many day traders have nothing to show for their efforts
but LOSSES!
Is it that their trading methods are no good?
Is it that they have limited experience in day trading?
Or is it that they lack the discipline to be successful in ANY
form of trading?
The odds are that all three of the above are probably limiting factors
in the success of most traders. It is, however, a lack of discipline that
is most often the culprit. The simple fact is that most day traders
do not possess the essential qualities for success. They are the
weakest link in the chain. Even a good trading method in the hands of
an undisciplined trader can become a ticket to losses.
Part I of this article will help acquaint you with the qualities that
I consider to be important in the quest for success as a day traders.
Note that these qualities are also important to short term traders and
investors. Part II will give you specific direction in the area of analytical
tools. Systems, methods, and timing indicators.
Discipline
Certainly by now you’ve heard the word "discipline" hundreds,
if not thousands, of times. It is probably one of the most worn-out terms
in all of stock and commodity trading. The problem is that merely saying
the word is one thing, but understanding its true definition operationally,
or on a behavioral level, is a far more important thing. What do
I mean by discipline?
• Discipline is not just the ability to develop a trading
plan and to stay with it, it is also the ability to know when your trading
plan is not working and, therefore, knowing when to abandon it.
Discipline is also the ability to give your day-trading positions sufficient
time to work in your favor, or for that matter sufficient time to work
against you.
• Discipline is the ability to trade again once you’ve
taken a loss.
• Discipline is the ability to ignore extraneous information
and to avoid inputs, which are not related to the system you are using.
• Discipline is the ability to maintain reasonable position
size and to avoid emotion, which leads to over trading.
• Discipline is the persistence required to maintain your
trading systems and to calculate the necessary timing indicators
consistently during the day, either manually or by computer.
• Above all, however, discipline is the ability to come back
to the trading arena every day, regardless of whether you have
won, lost or broken even the day before.
You can see, therefore, that discipline consists of many different things.
Discipline is not any one particular skill. Perhaps the best way to understand
trading discipline is to examine some of its component behaviors. Let’s
look at a few of these.
Persistence
This is, perhaps, the single most important of all qualities that a trader
can possess. Day trading, and for that matter all trading, is an endeavor
which requires the ability to continue trading even when results have
not been good.
Due
to the nature of markets and trading systems, bad times are frequently
followed by good times and good times are frequently followed by bad.
Some of a trader’s greatest successes will occur following a string
of losses. This is why it is extremely important for traders to be
persistent in applying their trading methods and to continue using them
for a reasonable period of time.
Those who quit too soon will not be in the markets when their
systems begin to work. And, those who quit too late will run out of trading
capital. Therefore, while persistence is important, it is also
important to know when a trader has been too patient when it is time to
quit and not play any longer using the system, which you have been using.
If persistence is so important, then how does the trader develop it? While
the answer is simple, the implementation is not.
Persistence is developed by being persistent
While this may sound to you like a circular answer, it is truly not. The
only way to be persistent is to force yourself initially to do everything
which must be done according to the dictates of your systems or method.
If you’re having difficulty, try this -- make a commitment to a
trading system or method. Follow-through with that approach for a specific
amount of time taking every trade according to the rules or, if the system
is subjective, attempting to trade the system with as much consistency
as possible.
If
you have been consistent in applying your rules, then you will find that,
in most cases, your consistency will have paid off and you will have profits
to show for your efforts. Even if your trading was not successful, you
will have learned a great deal.
You will have learned:
• You can follow a system or method
• You can trade in a disciplined fashion
• That the only way to do so is to be persistent by following
as many of the trades and rules as possible
Compare
this to the ignorance and confusion that comes from haphazard trading
or by applying trading rules inconsistently. Think back to your experiences
as a trader.
Remember your worst losing trades. You will find that those losses, which
have been taken according to a system or method, are easier to accept
psychologically. And, those who have not been accepted according to the
rules have often turned into terrible monsters -- ultimately costing you
much, much more than they should have, financially as well as psychologically.
If
you would like to master the skill of persistence, then you will need
to practice it. Make the commitment and I think you will see some wonderful
results, even over the short term.
Willingness
to Accept Losses
Here is yet another important quality that the effective day trader must
possess, acquire or develop. Perhaps the single greatest downfall of all
traders is the inability to take a loss when it should be taken. Losses
have a nasty habit of becoming worse rather than better. Unless they are
taken when they should be, the results will not be to your liking.
Although it is easier on one hand for the day trader to take a loss than
it is for the position trader -- because a loss must be accepted by the
end of the trading day -- it is still the downfall of many a day trader
who is unwilling to accept the loss when it is a reasonable one.
The good day trader must have the ability to take a loss when the time
to take that loss is right. What’s right is dictated by the particular
trading system or risk management technique which is being used. I would
venture to say from my experience and observations that perhaps 75% or
more of all large losses are due to the fact that losses were not taken
when they were small or relatively small or when they should have been
taken.
The day trader has two opportunities to take a loss:
• The first one is at the stop loss point as determined by
a system or at the predetermined dollar risk stop.
• The second one is at the end of the day.
A day trader is, therefore, fortunate inasmuch as he or she is forced
to liquidate all positions at the end of the day. This will keep losses
smaller than they would be if losing positions were carried over night.
Here are some suggestions as to how you may improve your ability to take
losses when they should be taken:
• Formulate your stop loss rules very specifically whether
they relate to systems or dollar risk amount, and type or write your
rules in large print.
Place the hard copy close to your quotation equipment, the computer,
which you use for trading, or the telephone from which you place your
orders. If you do not use a computer or quotation system for your trades,
then please keep your rule handy on an index card and refer to it frequently
during the day.
• Make the commitment to accept your next 10 trades completely
as dictated by your system.
Once you have done this, the behavior will become habitual and losses
will be easier to accept.
• Make your broker or partner aware of where your stop loss
will be and have them remind you that you must exit your position accordingly.
You may also wish to give them the authority to do so for you, assuming
of course, that your relationship with them is sufficiently close to
allow for such a procedure.
• A much more simple procedure, although one that I do not
necessarily recommend at all times due to the nature of day trading,
is to actually place your stop loss as soon as your entry order has
been filled.
These
suggestions will, I feel, help you master the ability to take losses in
a timely and objective (systematic) fashion.
The Ability to Avoid Over Trading
Too many day traders feel that they must trade every day. Let’s
face it, some traders are addicted to trading. A day without
a trade for them is like a day without a meal. The fact is that there
are some days which offer fewer if any trading opportunities.
The day trader who wishes to preserve capital and avoid losses as well
as unnecessary commission charges should understand that day trading is
not an every day event. There will be days when no trades are indicated.
Believe me when I tell you that things are better that way.
One of the telltale signs of the day trader about to go astray is the
“searching for a good trade” syndrome:
• Have you ever found yourself sitting at the computer or quotation
screen, bored because there have been no trades that day?
• Have you ever found your fingers idly rambling over the keyboard
searching chart after chart looking for stocks to trade?
Yes, my friend, this is the first sign of trouble. Should you ever find
yourself in this position, do yourself a favor and stop looking. Good
day-trading opportunities within the parameters I have set forth in this
course are plentiful, however, they do not occur every day.
Consequently, set yourself standards as to which markets you will day
trade and if there are no day trades in these markets do not allow yourself
to endlessly wander about the keyboard looking for day trades in such
things as orange juice or palladium. They may work for you from time to
time, however, the odds of success are very slim.
Take my word for it, the successful day trader will specialize in only
a handful of markets and will do well at these. Do not attempt to spread
yourself too thin by looking for trading opportunities where in fact they
do not exist. And this brings me to my next point.
The Ability to Specialize
Successful day trading is a time consuming undertaking, which requires
close attention. In many cases it requires diligence, follow-through and
persistence. Although some of day trading techniques lend themselves to
strictly mechanical trading, many do not. However, the vast majority of
techniques require close attention. Therefore it is unfeasible for most
day traders to be involved in too many markets at one time. I suggest
that day trading 4-8 stocks is sufficient for the majority of traders.
In fact, for new day traders, I would recommend specializing in only a
few stocks, attending to each one thoroughly and carefully in order to
develop your skills and to increase your overall profits.
This concludes Part I of How to Succeed as a Day-Trader.
In the next part I'll give you specific ideas on technical indicators
and methods to help you master market timing. In the meantime you might
be interested in my book The
Compleat Guide to Day-Trading Stocks, which is available
at amazon.com and other book vendors.
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