By Don Dawson, Online Trading Academy Commodity Futures Instructor
For those of you that have been in my classes, you know that I am a big believer in having a trading plan. Before you start trading with your hard-earned money, you must have this trading plan to create rules for you to follow in this sometimes unstructured career of trading. Once you have this plan, you no longer have to be thinking about what to do next once you enter your trade. You see the setup and take the trade, knowing exactly where you want to exit with a profit, how you are going to exit, where your protective stop goes and any other event that could happen while you are in this trade. In a sense, you become like a machine; you have taken a majority of the emotions out of your trading because everything is thought out prior to the initial action of taking the trade. As a professional trader following your plan, you will start to see more consistent profits and that is when you start to notice your days are just blending together. In another way, each day just seems to be a non-event. You will have days where you will make money and then there are those where you will lose money. Your winning days will be larger than your losing days, just another day in the office. No real stress or guessing when it comes time to react, just pure action. One of my favorite quotes is "The ideal action is one that leaves not a split second between the urge to action and the action itself." There are going to be days where you will experience sheer exuberance from days of making more money than you ever thought possible. And then you will have days where it will be just short of sheer terror. The other type of day is the quiet range days. And then the cycle starts over.
The keys to handling this cycle are:
- Developing the patience needed to deal with the many quiet market days
- Developing your discipline to make sure your expectations do not get overblown on the exuberance days
- Knowing yourself and being prepared ahead of time to deal with the inevitable bad days
Days The Market Goes Quiet
Many new traders come to the Futures markets with very high expectations of making lots of money on a daily basis. This is understandable based on the reputation of the Futures markets. Futures are known to be like the Wild West with excitement, volatility, instant wealth and the truth is that there are many days when a trader's account equity will not change much at all or just stay in a normal range of normal ups and downs. Traders who use a particular strategy consistently and adhere to very strict money management rules will find that these types of account equity doldrums are quite common. New traders are known for coming into the market and using a multitude of strategies and have little if any money management skills. In essence, they are just gambling. This type of trading account will see equity spikes both on the positive and negative side on a very regular basis, not a very good way to run a business. During these quiet times while you are patiently waiting for a setup based on your trading plan, there may be market rallies/declines, major news events or even the "talking heads" calling for a major trend change, but you as a disciplined trader will wait for your signal. As you wait, watching the markets fluctuate on a daily basis will make you feel like you are missing so many opportunities. It is during these times of sitting on your hands and waiting for your setup that the frustration runs high and the urge to just place a trade becomes stronger and stronger. This is known as a boredom trade and I can tell you, they will almost all turn into losing trades. This is the market's way of pulling in the weak hands to commit their money and then the strong hands reverse the market quickly causing all the scared sheep to run for the exits. During these quiet times is when you must adhere to your trading plan and not make a trade just because you have not made any money lately. When you created your trading plan, it was based on a back-tested strategy and good money management. Patience and confidence will come from knowing that if you wait for your setup, your percentages greatly increase for having a winning trade. Confidence in your trading plan leads to patience waiting for your setups.
The Exuberance Days
People coming into the trading arena are typically accustomed to making money by working long, hard hours for not much pay to show for their hard work. So when they have a day in the market where the skies open and drop more money into their laps than they ever thought possible, this could very easily create some problems for our trader. Much like many who win multi-million dollar lotteries and a few years later are bankrupt, if we are not conditioned to handle windfalls of fortune, we are destined to give it all or worse, even more back. Once you have a large win or two, you become seduced into thinking this is easy money. All of a sudden you are thinking to yourself in terms of annualized returns based on this one trade. Perhaps you are saying, "If I do this 3 times per week and trade 50 weeks per year, I will have xx billions of dollars by year end!" Can you see the dangers here? Anybody who trades on a regular basis knows that these windfall trading days don't come along all that often and then in between them, we have this thing called "equity draw downs". Hopefully our new trader here does not go out and start living a lifestyle of this billion dollar trader. These are the kinds of days that lead to inflated expectations of future earnings in the markets. The euphoria created from these days can lead to an addiction to this fast, easy money. The danger is you may start to ignore your trading plan trying to keep this adrenaline rush alive. First thing that starts to happen is you begin to take on much more risk than your plan calls for and it subsequently self destructs because it was not designed to trade this way. The next thing is you become careless in selecting your trades. When your account is small, you are very particular about your trade selection simply because you don't have much room to be wrong. When you have this extra "free easy money" in your account, you can very easily become careless. I would recommend only keeping enough funds in your account to meet margins and have some extra for losses. Otherwise, I would transfer the excess funds to an interest-bearing account that is easily accessible for wire transfers in case you need the funds. One other event that tends to happen when you have excess funds in your account is that you tend to let your losers run further than you ever would have in the past. This is a very big red warning flag and is how you can lose more than you made very quickly.
Theoretically, you should not let emotions interfere with your trading. Thereby, you should not let making money get you all that excited nor should you let losing your money be demoralizing either. Just treat each day the same and try to keep your emotions on a plateau. All that said we are all humans and we will let our emotions into our daily lives. The key here again is being prepared for how you will handle this event and having great discipline.
Our trading plans should have a section covering how we will handle these profits. If you receive this windfall and are still in the position, you really should have a strategy to help see you to the end of the trade. How many times have you seen greed kick in and not let somebody exit a windfall profit trade and see the whole trade turn into a loser? It happens more than you care to know. Your discipline will be the key in handling these windfall trading days. As I was saying, we are all humans and we will have emotions. The key is not letting this particular day have any impact on your future trading sessions.
The Inevitable Bad Days
After reading that last section, you probably did not think these days come along did you? Guess what? They do, and they are just a part of doing business in the trading world. It is how we handle these days that separates us from the losers.
These days may come in a series of days or perhaps a trade that gets away from us due to a morning gap or major news event, but regardless, you can expect to see these days throughout your trading career. Once you accept the fact that you are going to have these bad days, you will need to be prepared to keep your bad days from turning into catastrophic days. Keep in mind there is a big difference between a bad day and a catastrophe. I remember Alan Greenspan's speech about over-exuberance at a time he was trying to slow down the economy and his analogy about our economy growing too fast. "If the market is going to crash, I would rather see it crash at 55 mph than at 120 mph." Just like a bad day in the market (55 mph) and a catastrophe (120 mph), at least you have a "chance" of walking away from the 55 mph crash. We want to make sure we can come back and trade tomorrow. A really bad feeling is blowing out your trading account and having to go out and get a real "JOB" to raise equity to come back and trade. Remember, a catastrophe not only leaves you financially ruined, but also ruined emotionally. When you come back to trade, you will always have that fear of losing in the back of your head and this can lead to future problems of pulling the trigger to initiate a trade. This leads to being notoriously late entering your trades.
The secret to dealing with these bad days is to be prepared for them. I hear you laughing now; I know, it is easier said than done. Remember that most new traders come into the business with very high expectations of success and pay very little attention to the risk, chances or residual effects of bad days. Two important elements to consider for being prepared are proper money management and having realistic expectations.
I employ a money management / risk technique I call a circuit breaker. I have a maximum loss per trading session built into my trading plan. If I hit this dollar amount during the session, I literally leave the office. This eliminates the urge to revenge trade. I have found that if you lose in the morning session and come back in the afternoon thinking you are going to make it back, you end up losing even more for the day. These types of days are to be expected. One strategy does not fit every market environment - you may be distracted by something unrelated to the markets, you may not feel well or any other host of events can cause you not to be in sync with the market that day. Stop throwing your money away and walk away from your desk. This allows you to come back another day and trade. You will be amazed at how much better you feel about yourself when you have the discipline to walk away from these types of days. It works, trust me.
The following quote I felt was very descriptive about trading: "You can't have a better tomorrow if you're thinking about yesterday."
Good Trading,
- Don Dawson
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