I take my weekly trading reviews (and those of my students) very seriously. I look at what I did well, any mistakes I made, and consider the areas I can improve upon. I write down notes and often come up with new and interesting research ideas to explore in the weeks ahead. Developing as a trader is a never-ending process.
Even if you are doing well, you should always be looking for ways to improve your edge and up your trading game.
Trading is no different than any other competitive endeavour, in that about 20% of the results come from skill and 80% come from your mental approach. It's for this reason that I was recommending a number of books on sports psychology to the STA traders recently, but digging into that is a subject for another post.
What I wanted to do today instead is to focus on three key trading lessons that I've seen from some of our STA members that might help those traders who follow this blog. First, let's take a look at one of our trader's results for the week.
The Weekly Breakdown
To start, I wanted to take a look at AK's results for the week. He has been doing quite well in the program and is quickly finding consistency in the market. Over the past three weeks alone he has made over 30 points and I don't expect him to be slowing down any time soon. Here's how AK's four days of trading looked this week:
While I don't like to focus much on it here at STA, people are constantly asking me how much money a successful day trader can make. The chart below breaks down how a trader would do if they could consistently make 13.5 points per week in the markets. While this is well within our STA target of 10-15 points per week, keep in mind that even for experienced traders some weeks may be lower and some higher. We also recommend that new traders only trade a single contract until consistency is established.
Lesson #1: Win Ratio is Just One Part of the Bigger Picture
My favourite take-away of the first chart above is that it shows the power of a good risk to reward ratio and having a positive expectancy. AK only won half of his trades this week, yet he made a massive 13.5 points! Many people out there think that in order to be a successful trader you need to win 80 or 90% of the time. There's even a group who endlessly searches for the elusive "Holy Grail" of trading systems that will allow them to win 99% of the time so they never need to take on real risk. While it's certainly possible to get your win percentage into these areas with a lot of experience and a proper plan, it's far from necessary to be successful.
As long as you are able to keep your losses small and your wins large, you will have a positive expectancy and make points on a consistent basis as a trader who only wins half the time. That's one of those big "secrets" of trading that people don't like to talk about. We can be so afraid to admit to ourselves and others that we sometimes lose, that we fail to realize that embracing losses is a natural part of trading success.
Once we fully understand this, it allows us to trade without fear or ego, and truly maximize our results.
There's a secondary lesson here as as well. A brief glance at AK's results for the week will tell you that he really only came up way ahead due to a single day. It's a bit unusual for one day to stand out so much from the rest, but at the same time this is a crucial part of trading over the long term. Not every day is going to be a massive winner simply because not every day has numerous quality opportunities and huge potential. The professional trader understands this and realizes that trading can often be a bit more of a "grind".
What's important to the professional trader is that they can win most days, and that on the losing days they are able to keep the negative hit very small. Doing this lets them consistently churn out solid weekly profits and then when those excellent days come around they can take full advantage. I usually call days like Wednesday the 29th an outlier, and it's those days that are truly the keys to the castle that jump your equity curve to another level. Of course, with experience the number of losing days decreases even further, to the point that an accomplished Emini S&P 500 trader will often go weeks or even months without a losing day.
Lesson #2: Don't Get Too High or Too Low
A couple of weeks ago I was talking to one of our STA traders who was beginning to do exceptionally well. Weekly results were improving, and there was talk of the trader taking his trading business to the next professional level. Spirits and confidence were high, and rightfully so!
At the same time, this can be a very dangerous moment for a developing trader. The human mind and the ego within are very complex, and it often can't help but manifest right when we are at our most vulnerable. If you've traded before you know where I'm going - the dreaded trading collapse and loss of profits. It's an all-too-common phenomenon in the world of trading. We're doing well, our confidence is building, and we now have no fear. Suddenly, everything starts to go wrong as rules are broken and rookie mistakes are made.
This happens in most cases due to over-confidence. Suddenly we feel like we simply can't lose, so we do foolish things like increase our position sizes or ignore our trading rules to enter positions. There's always the occassional situations where something like this can be acceptable, but when it's repeated without solid reasoning it's a recipe for disaster. For this reason I made sure to talk to this trader about the importance of maintaining an even emotional balance.
Though he was doing very well, it was no reason to get overly excited or supremely confident to the point that he broke the rules that got him there.
The trader accepted this by realizing he was in trading for long-term results rather than short-term gratification, and has seen his consistency continue with excellent results on a weekly basis.
At the same time, it's important for a struggling trader to never get too low. Similar mistakes in terms of position sizing and aggressiveness are made during periods when a trader is frustrated with results, so it's crucial to maintain a long-term outlook and stick to the plan. If you know you have a time-tested approach and you feel confident in its statistical edge, there is no reason to start pushing outside your trading plan and increasing size at a time when you are struggling a bit. Eventually the edge will come good and you will continue to make strides, as long as you are determined to continue on when so many others would falter.
Lesson #3: You Don't Need to Be In Every Trade
The final lesson came from another of our STA traders, who reminded me of something very simple yet very powerful. This trader had been struggling with inconsistency in his results lately due to being a bit too aggressive in his trading. In this case, the trader's desire to succeed and make profits each day often seemed to get the best of him as it would lead to trades he quickly realized he should not have taken as they didn't fit the rules.
This desire for trading success is a great trait, but occasionally it can hinder our progress if we don't keep it in check.
In this trader's case, the first step to finding a solution was taking a step back and doing some extra simulated trading. He already knew that it was aggressiveness that was hurting him, but it was only once he put in the time and study that he actually realized the true impact of his recent trading actions. As a result, this trader has now jumped to the other side of the spectrum as a very conservative day trader and his results are starting to improve. He has realized that he doesn't have to get into every trading situation to make money as a day trader and this will free him up emotionally to better focus on the market as a whole.
In order to find trading success, it's vital that we find a personal style that is emotionally comfortable.
Our day trading system as Samurai Trading Academy was designed with some individual flexibility in mind, and this trader has embraced that by taking a step back and re-building confidence. By being patient and taking only the higher quality setups (trading with a sniper's mindset), this trader can build confidence and continue to grow.