As a day trader, you have already decided to take a big risk. I know firsthand that the easy decisions come easy – and I commend you for going after your dream of becoming a part-time or full-time trader.
Whether you have done your research, found a great firm and mentor, or maybe came into some extra cash and want to test the waters in this “trading thing,” understand that big risks in life are not the same as big risks as a trader in the Stock Market.
I know you have heard of someone; or know someone who knows a trader that had a HUGE day trading. They may have made $10,000 or $100,000 or even $1,000,000 in one day! Now, what you may not have heard is one of two things:
1) They have a 100 Million dollar account and only made 1% that day
Or most likely…
2) They lost that same amount PLUS 10% the next day, month or year.
Big risks trading in the Stock Market will always get you one or the other: a huge gain, or a huge loss. When your conditioning is, “bet the farm on black” at your closest casino (sorry for the analogy Steve Wynn), then you probably don’t have the proper conditioning to NOT do it again, and again and again.
Real professional traders know exactly how much they could lose in almost every trade they take. If your thinking is, “my max loss on this trade is $500,” then you lessen the fear of losing $500 because you know it won’t be more.
Because you have that loss in mind (max amount of pain), you will also make a conscious decision if you are comfortable even losing that amount. If you’re not, you may need to trade fewer shares, or have a tighter stop. The only thing that really is predictable on every single trade is how much you can lose (unless you are holding a stock overnight).
In my trading, I knew my max loss every time, and had no idea how much or little I would make. I remember hearing a story from a friend of mine that I think you will relate too.
He always loved racing cars. One year, he decided to take one of those Indie 500 type race car lessons. If you are not familiar with them, what happens is you go to a real professional race track (the ones that go in a circle) and you pay some Pro Driver, to teach you to drive like they do.
On his first lesson, the Pro who was sitting next to him said, “The biggest challenge when driving over 150 miles per hour is what you do when all goes wrong, and you are spinning out of control. No matter how well you are driving, there will come a time, when you spin. The most important thing you MUST do is to NOT stare at the wall, in hopes you won’t crash into it. If you focus on not hitting the wall, you will drive smack right into it. What you have to do, is focus on where you want the car to go, and pull it in that direction – and you will be fine.”
Well, as you can imagine, the car spun and he looked at the wall. What the Pro did during this, was to grab my friends head and turn it to the track and away from the wall. After 5 times, he had it.
How much money you can or want to make is the wall. I know it sounds backward, but it’s not. If you focus on making a certain amount of money on each trade, you will lose sight of the direction of the trade and where it is going. You will focus on making this number and you could be headed right for the wall.
Now, don’t focus on losing money either. Know your risk, and your max loss, and focus on the trade itself – which is like the road. Let the trade dictate the direction, ebb and flow with how it is moving, and YOU make the decision on when and if you should take of some profit, move your stop to break even, and let a portion stay in the game.
Keep your focus on the big picture. Large potential wins (the $ you pick), and large potential losses (an undefined number) cause a lot of emotion… and not the good kind.
Keep your risk small (determined by you) and focus on the end result – a good smart trade – the “road.” Focus on following your rules and doing the best in the trade, no matter what the result. Know your max loss, so if the result is bad, you know how bad it could be.
Small risks in trading, big risks in life… never ever the reverse. That’s what I did, and it has brought me much success.