In many areas of life, success is hard to measure or even define. Day trading isn’t one of them. Every day you trade, you’ll know that it either was “green” and you made money, or it was red. It’s a superficial way to look at things, though. There’s a better way to measure success as a day trader: do you make money over the long term?
That’s because the short term doesn’t really count. On any day, a rank beginner can get lucky and make a wad of cash in minutes. A person can also walk into a casino, pull the handle of a slot machine once, and hit the jackpot. Those are both cool and fun. Too bad they’re not repeatable.
Even though day trading involves many variables that are impossible to predict, I can guarantee you one thing with absolute certainty: If you’ve been in this profession for more than a week, you will have red days.
I can also tell you something that comes from my experience of placing over 20,000 trades: the most critical skill for you to develop to succeed long-term is to learn how to lose money the right way. In other words, how to have successful red days.
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It sounds like a contradiction, right? How can you be “successful” at losing money? Let’s answer that by looking at the three components of any trading day:
- How you did.
- How you felt.
- How you acted.
For the “how you did” component, we will assume that you lost money. Maybe the day started out well, but you were in the red when you netted your trades.
The second component — how you felt — is the cauldron of emotions you will definitely feel while you trade. I’m here to tell you that these emotions never entirely go away. They’re not like learning to ride a bike, where you can pretty quickly master the challenge, and things become automatic. No matter how experienced you are at trading, a voice in your head will make urgent suggestions when you’ve lost money. They will be things like:
- We’ve had a winning streak of 10 green days — the longest ever! Let’s not break it. Keep trading a little longer.
- We may be down to our max loss, but it’s still early! We can make it up. You know we’ve done it before.
- Sure, we’re down, but now’s a great time to “buy low” and reduce our average cost. That’s just smart investing.
The voice in your head is so persuasive! It sounds just like you, and it sounds so reasonable. One little problem: That advice goes against your trading plan.
“What trading plan?” you ask. Here’s where we introduce the safety gear you put on before attempting to scale that rock wall, also known as day trading. Before you take your first trade, you need to know your maximum acceptable loss for the day. That’s in addition to knowing other key parameters like your max loss per trade and the max amount of shares to trade.
The whole purpose of the trading plan is to give you rational guidance when your emotions enter the fever zone while you’re in the heat of trading.
This is where that third component, “How you acted,” comes in. You feel the urge to double down on that last bad trade, but you resist the urge and act correctly by not taking another trade.
This gets back to our definition: A successful red day is one in which the market went against you, but you stayed within your pre-agreed trading parameters. You did your best, but things went south. You didn’t abandon your max daily loss boundary; instead, you quickly acknowledged the reality that today was going to be red, and you shut it down.
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If you have that discipline, you’ll soon realize it’s easy to recover from small red days. Yesterday, you lost a little, and you promptly ended things. You don’t have an enormous challenge today because you didn’t dig yourself into a deep hole then.
If you’ve followed me for any time, you know I’m a huge proponent of keeping a trading journal. It’s critically important for you to review your trades when they’re not in the heat of the moment and when you can sit back and analyze the trading day rationally.
Over time, I’ve realized two profound truths:
On days when the market is strong, and I’m making money, I’ve made a disproportionate amount of my annual profits from letting my winners run. I’ve resisted the emotional urge to “shut it down while I’m ahead.”
Conversely, the longer I’ve been in this profession, the faster I’ve become at cutting my losses and admitting that today will get marked down as red. I couldn’t make it green, so I settled for the next-best thing — making the red day as small as possible.
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Little hinges swing big doors. The difference between making five cents a day per share and losing five cents seems so small, but it’s actually the long-term difference between success and failure in this business.
Limit your losses and let your winners run. That’s despite your emotions screaming the opposite.
You can’t control the markets. And if you’re a human and not some AI bot, you can’t prevent strong emotions from growing. What you can get better at is controlling your actions. If you do that on your red days — even most of the time — you’ll have taken a giant leap toward long-term success in this profession.
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