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Thursday, December 13, 2018

Guest Post: "Reflecting on 2018 and Preparing for a New Year"



“Every trader has strengths and weakness. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach.”
                                                                                                                 -Michael Marcus 



First, I would like to give a very big thank you to Trader Stewie and the AOT community, for an incredible trading year. I’ve been an active member of the AOT community for almost a year now, and I’ve enjoyed every second of it. Thank you to Stewie and all of the AOT members for all of the day to day interactions and encouragements. We should all be very proud of being part of such an incredible service and community. I’ve seen newer members make great strides 2018 in their trading journey. If you’ve came out on top this year that is a very big achievement in itself. Be proud of that! 2018 has been a wild year for the markets! Sideways chop, big intra-day ups and down and uncertainty. Take a look at this QQQ daily chart!

This is what we’ve navigated!





That being said, everyone has trading ambitions and goals. As we head into 2019, this is the time to highlight your strengths and weaknesses, and build a set of solid, manageable, and attainable goals for the year ahead. We’re coming into a new year, this could mean a fresh start to some, or a continuation of what you’ve worked very hard to obtain. I always like to take a good hard look at my trading at the end of every month, quarter and year.

This year I’ve broken my trading performance down into two categories. I’ve tried to highlight everything that has held me back, or has potentially cost me money in the year of 2018. You have to be honest with yourself. I’ve organized these weaknesses into two categories. Internal and External factors. I’ve categorized anything under internal factors that might be considered skill sets or something that might take more practice, and time as a trader to develop. Anything under external factors is something that is directly controllable now, and in your power, to change immediately.  I’ll list some of the things that I’ll be working on and changing for 2019.


Internal Factors:
Always sell gap ups. PERIOD!
Using mapped out levels on the 5-minute chart, use market limit orders to enter day trades
No more than 2 day trades a day. 4 failed day trades in a week = STOP.
Don’t be afraid to use weekly options to mitigate risk when trying to play short term market reversals
Feeling uneasy or burnt out? Take a break. Clear out all positions
$1000+ gain in one day. Sell positions. Take the day off.


External Factors:
Switch to a broker with more flexibility in terms of advanced trading options. (Trailing stops, faster and easier execution of market orders, after hours trading etc….)
Trade directly from my trading software. (Faster, more control)
Upgrade my trading arrangement (New desk, Monitor, Chair. Make it feel more professional)
As you can see with these two lists, these are things that I’m going to actively work on, develop and practice throughout 2019. As market conditions change so will the lists to an extent. As for the external factors, these are things I just need to do. Nothing is holding me back, I just need to check these items off the list.
In order to come up with your own lists of internal and external factors for your trading, you need to highlight what you’re good at and really be honest with yourself, as to what you’re not so good at. The reason why it is more important to highlight the negative then the positive for this situation is because you already know what is involved in being “good” at your current strengths. For your weaknesses you’ve probably been more frustrated than constructive in those situations, so highlighting the negatives, and where you need improvement is very important in the development of your trading. Some weaknesses you might have are proper capital management, chart reading, entering / exiting positions to late or to soon. A very common external factor might be following way too many people on twitter.  Maybe you don’t have a clear plan at all. These are all things that you have time to look at, plan out and work on now as 2019 approaches.


A very informative and eye-opening post I always like to refer to is "Stages of a Trader" by Bo Yoder. It can be found on Trader Stewie's blog. If you haven’t read it, I encourage you to read it. I can almost guarantee you, you’ll be able to pin point yourself in 1 of the 6 stages. You might ask “well what good is that to me?” I think if you’re able to identify yourself in your current state of trading you’ll be able to make the improvements and adjustments you need to make in order to make it to the next level. I’m sure reading this will help you come up with a very constructive list of weaknesses that you can use the new year to practice and improve on.

https://theimpatienttrader.blogspot.com/2017/09/stages-of-trader-by-bo-yoder.html

Another great resource from Trader Stewie is his “Things I’ve Learned After 15 Years Of Trading” blog post. Reading through this will open up many weaknesses you never thought you had.

http://theimpatienttrader.blogspot.com/2011/10/things-ive-learned-after-15-years-of.html?m=1

Here are some great points that really stick out to me on this list. 

Trust your gut, if something doesn't 'feel' right, sell it. Analyze it from the sidelines (emotion free)
Learn to be patient once in a winning position. Learn to be very impatient when in a losing or questionable position. Lowering a stop loss is the first sign of trouble. You are breaking the rules and emotions are starting to creep in.
Your 'hardest' work should be done while the market is closed. So that when the market opens, you will be prepared once your setups become active.
Never ever, get into a position that is "too BIG" for the account size. All it takes is a few bad trades to cripple you beyond repair.
If you have no solid plan (i.e. Setup, proper entry, stop loss, exit strategy, target), then why are you in the trade?
Most traders are never "happy" with their trades. Understand that no trade will ever be "PERFECT".
Over trading is the POISON for your trading. LESS IS MORE!
You will never buy the exact bottom and you'll never exact sell the exact top: Don't beat yourself up if "you left money on the table"


In conclusion, this will be my last AOT guest post for 2018. Once again, thanks for all the support, encouragement and social interaction through 2018. I hope everyone has a great holiday season with family and friends!

@87AlwaysRed!

Sunday, December 9, 2018

How We Traded This Week's Market

Hey folks! 


I wanted to do a 'STEP-BY-STEP' educational post to explain what I was seeing through out this week's insanely wild market action and how we traded to end up making it a profitable week for AOT members! 

So here goes.... 


So as we all already by now... The market gapped up almost 400 Dow pts on Monday morning after the "successful" G20 meeting between the U.S. and China... 

We came into Monday long MSFT from $110.60 entry since on Friday it formed a very nice "INSIDE DAY" pattern... 



Here's how I normally like to trade INSIDE DAY patterns: Learn to spot these since they can be a very effective pattern to add to your trading arsenal! 







That MSFT chart was begging to BREAKOUT! 
Thus felt very comfortable swinging MSFT into Monday from Friday's entry especially since it literally closed at the highest tick of the day on Friday's close..... 


**** FAST FORWARD TO MONDAY MORNING ****


Come Monday morning, index futures were VERY nicely green and thus feeling very good about the odds of a big gap up on Monday for our MSFT long position....

And it did indeed gap up on Monday... MSFT gapped up over +$2 on Monday's open so we quickly raised stops to ensure at least a GREEN TRADE just in case the market decides to reverse back down...

We raised stops to $111.00. Shortly after the big gap up open, the indices started to fade lower slightly and took out our MSFT for a small gain of +40 cents. 

Sometimes it can be hard to not get frustrated when you see a stock up over +$2 in your favor and then get stopped out for a much smaller gain... but this is trading! Better get used to it and learn to move on methodically to the NEXT trade!  


Green is green and we move on to the next trade! 


While scanning for new setups on Monday afternoon, GRUB caught my attention as it was setting up in a very nice FALLING WEDGE bottoming pattern.... These types of patterns normally breakout nicely higher... 
As much as I liked that GRUB Falling Wedge setup, but since the market made a big multi-day run up ... we went into GRUB with a only a HALF SIZE position size ....  



Trade started to work nicely so felt comfortable swinging it over night especially since the trade was only HALF SIZE and also started to work nicely soon after we entered the long position.... GRUB closed the Monday session about +50 cents higher from our entry... 

****Fast Forward to Tuesday morning****

The next day, the market opened kinda soft and looked suspect on long side.... 

Our GRUB long position opened green and the trade looked promising since it was showing "relative strength" early in the morning since the market was slightly lower yet GRUB was green and trying to breakout from that FALLING WEDGE pattern.... 


Look at the VXX(VIX) chart below... On Tuesday morning, it was actually RED as the overall market was slightly red which normally favors the bulls.... 


Literally two hours later... the VIX EXPLODED higher at first seemingly on NO NEWS... the market collapsed lower and of course took out our GRUB long position with it. We stopped out of that HALF SIZE long position in GRUB for a -3.8% loss. Thankfully it was a smaller position so the loss wasn't too bad. 


When it comes to trading, POSITION SIZE MATTERS!! 

Can't repeat this enough times, POSITION SIZE MATTERS!!  


Tuesday, around mid-day, there was starting to be doubts about the so-called "successful" G20 meeting... Algos wasted NO TIME, like they ALWAYS do, they SELL OFF HARD FIRST and ASK QUESTIONS LATER... this is what algos do. They are programmed to react to news and more often than not, the moves are FAST, BIG and DRAMATIC! 


At this point, we were back to sitting on 100% cash and stalking new entries


MTCH, started to catch my eyes as a very nice SHORT setup so we entered MTCH short on Tuesday mid-day and the trade literally started to work almost immediately.... 


We entered MTCH short at $39.05 and the trade started to work lower immediately .... 

This was setup that was tweeted/emailed to all AOT members ... 



The market closed on its lows on Tuesday(Dow closed down about 800 pts) but the NYMO was just coming off "overbought" territory so i was very confident that today, the market would GAP DOWN at the open and even mentioned it in the private twitter a couple of times. So decided to swing MTCH short into today, fully anticipating the market to gap down and take MTCH lower with it.... 

As you can see below, MTCH did indeed fall nicely at the open as the market(Dow Jones fell about 500 pts) at the open... Brutal nasty gap down open... obviously, exactly what you want to see when you're holding a short position! 

MTCH hit $37.00 on today's open, we shorted at $39.00 so the trade was up a cool +5% since we entered... 


 Read chart notes above to see the STEP-BY-STEP thought process behind the MTCH intra-day action today and on Tuesday! 



***** FAST FORWARD TO TODAY around MID-DAY*****

Market was tanking hard, sentiment was piss-poor and you can almost "feel" the sentiment on twitter... Traders were discouraged as sentiment turned so sour... People losing faith in stocks as legendary hedge fund manager, Leon Cooperman was saying live on CNBC around mid-day... 

At this point, i had closed that MTCH short for a +2.75% gain and turned off my twitter and and was intensely focused on plowing thru my charts(both indices and individual stocks watchlists) to gauge the "market's temperature" under the surface...  
Public twitter was OFF at this time as i didn't want my market views or chart analysis to be "tainted" by anyone or anything... I wanted to observe the action and movement of the charts in an absolute "vacuum" if you will....   

What are my charts doing right now? 

What are these charts trying to do? 

What are they trying to do here?

Wait a minute... closed MTCH short but what's MTCH looking like now?!   I'm just curious! 


Holy mother of god!!! Look at what that MTCH short is doing now!  I'm like, "OK, good call on closing that short, Stewie!"

Like i always like to say, "Short squeezes are like cockroaches, when you see one, there's usually a bunch more around the corner!"

So, I'm thinking, well if stocks like MTCH are starting to gap down and SQUEEZE or REVERSE back higher... what else is doing that?! 
AMZN? check! 
NFLX? check!
AMD? check! 
GOOGL? check! 

etc etc etc .... I'm now seeing the Dow Jones and other indices still dancing around near the day's lows(we're now down almost 700 pts on the Dow Jones and down 1,700 points in two days!!) yet many stocks on my PEG(Power Earnings Gap) list are flat or green?! 
How's that possible?! 

I start plowing thru my charts again... and again... and again... obsessively determined to figure this enigma out!

Meanwhile I'm still answering AOT members' questions via the private twitter! 
Doing 'Chart Requests' and responding to emails that are coming in at a faster pace than usual due to the volatile market! ... most people don't see the "behind the scenes" work that I put in on a DAILY basis! 
but you know what?! I love it, i often feel like it's "my calling" and can't do without it! 


Around 12PM to 12:30PM(mid-day Thursday)



***These next series of charts started to catch my attention*** 

Dow Jones Chart


KRE Daily Chart


What i'm seeing in the ABOVE two charts(KRE and Dow Jones) and actually many other index charts which i didn't post in this post but the basic premise is all the same!! 

MACD and RSI divergences: this is the simple yet SO reliable situation when PRICE does one thing yet the RSI and MACD do the exact opposite! So in this case, indices were tanking to retest the October lows yet the MACD and RSI were well above the October lows and making HIGHER LOWS which creates a "divergence"... so in today's case, that's called a BULLISH or positive RSI and MACD divergence
These divergences are what creates TRADING OPPORTUNITIES! Top notch trading opportunities to the traders who know how to spot it and remain cool, calm and collected enough to execute the trades once the signal is there... set the stop loss(es) and let the price action go from there!  


AMD Daily chart






CAT daily chart



CAT intra-day chart and STEP-BY-STEP thought process 




The thought process and execution of these trades went hand-in-hand with my trading system and my trading style and that's what every trader strives to do, day in and day out... 



****The Next morning, Friday****

The market attempted a Follow-Thru rally from Thursday's big reversal.... but that early morning rally was very weak, meager and highly suspect since most of the stocks on my watchlist were RED despite the indices making a bounce attempt(basically exact opposite of the prior day!) 

We raised stops on our AMD and CAT long positions to ensure we at least exit with gains in case the market rolled over again. 
Remember, in this kind of market, you have to be flexible and be ready for ALL outcomes. 

We stopped out AMD at $20.95 (+0.15% gain). 

Quickly raised stops on CAT and stopped out for a +$2.30 gain(+1.80% gain).  



At this point, we are back sitting on 100% cash and on sidelines, stalking new entries as we slowly watched the market's early morning bounce attempt slowly fade to red as sellers once again reasserting their dominance... 


While scanning for new setups around mid-day on Friday, OIH caught my attention as a very nice SHORT SETUP... 

It made a nice gap up at the open on some news out of OPEC but the bounce looked weak and counter-trending in nature. 

Here's what I see in USO right now... a strong, persistent downtrend in this name with buyers nowhere to be seen and usually selling on any sort of bounce... Last few days, USO has tried to bounce but with each "bounce day" looking like a "Distribution day" instead(strong high volume selling).... 

As of of the writing of this post, that OIH short position is +3.25% since our entry and we are actually swinging it into Monday since OIH closed on the day's lows, felt comfortable swinging this position since we built a big enough cushion on the trade(and we lowered the OIH stop loss to $17.40 as we approached the close on Friday). 



We made 6 trades this week: 

MSFT long (Normal size position) : +0.36% gain
GRUB long (Half Size position) : -3.85% loss (or -1.9% of a Normal Size position)
MTCH short (Normal Size position) : +2.75% gain
AMD long (Half Size position) : +0.15% gain
CAT long (Normal Size position) : +1.80% gain
OIH short (Normal Size position) : +4.50% (Update: closed OIH trade on Monday Dec. 12th)


The Dow Jones moved up and/or down 600 to 700 points almost every day this week, therefore a trader's ability to be nimble, flexible and OPEN MINDED is vital in this kind of market. 

Money can be made on LONG side and SHORT side... 

A trader's ability to ADAPT to a rallying or falling market is very important since the moves can be so dramatic in either up or down! 



Some of the feedback i got this week from AOT members was truly humbling. This kind of feedback is the BIGGEST driving force behind AOT! 


Stewie,

I wanted to start by thanking you for your diligence with researching and teaching. It has been immensely helpful with such a crazy market right now; not to mention the knowledge I have gained to apply to my trades when we finally do find a bull market(and I’m still new).  I have been a subscriber to AOT since the start of September, and plan to be a member as long as you are at the helm of the ship! I make sure to save every educational post you write up, and soak up all the information I can on your AOT website. On a given day I will spend anywhere from 1-5 hours charting, reading, and studying various aspects of the market, but consistently your materials are my primary focus.

Near the end of yesterday’s session, I almost bought some AMD Calls to hold through the night, but reminded myself ‘Don't chase, and there will be other opportunities tomorrow’. - This mindset was instilled by you. On to this morning; I still wanted to buy those AMD calls, to not miss out on any profits; LITERALLY THE MOMENT that I went to execute my purchase you posted not to rush today and to let stocks play out. Instead of purchasing call options on AMD, I held off until after your OIH trade alert to go short. I then bought some OIH Put’s and sold them two hours later for 67% profit! (AMD dropped HARD only moments after you suggested holding off, which would have resulted in a loss for me on that one) This is just one example of when I thought a trade seemed like a good idea, then I exercised your methods and profited rather than lost out on the trade I had planned on.

Moral of the story: Instead of going into the weekend angry with my decision to rush and chase AMD, I profited on my only trade of the day and am going into the weekend 100% cash, after a 67% win in today’s trade! I am only in my eighth month of investing/trading and joining AOT is a HUGE game changer. I feel comfortable looking at charts and even feeling the 'vibes' they are giving off. I am looking forward to learning more as time goes on, and felt it necessary to fill you in on how your teachings effect your students.  So thank you for your guidance and wisdom you share, and I am looking forward to future posts you share!!

Have a great weekend and thanks again Coach!

Mike W. 



I hope you found this post helpful and educational! 


Happy trading !!



Saturday, November 24, 2018

The "Controlled Selling" Phenomenon

Hey folks! 

It's now been exactly 8 weeks since the market topped out, back in the 3rd week of September... 
The market has been rather tricky to trade lately but it's becoming increasingly clear to me why that's been the case. The markets are usually most volatile and challenging to trade at major turning points as the balance of power slowly shifts from the "old guard" to the "new guard" ..... 
Picture a gigantic cargo tanker ship doing a 180 degree turn in the middle of the ocean....


 
These "major market turning points" takes time and effort to accomplish and along the path, there's going to be a lot of brutal battles ardently fought out between the bulls and bears, each side fighting it out for every twist and turn, support and resistance levels on the charts.... 
but after a little while, you take a step back and look at the chart action, a more clear picture starts to emerge of what's happening.... 
I think we are at major crossroads here and i find this extremely fascinating since it's been over 9 years since the "FED induced" bull market was born in March 2009.... and now the FED seems intent on reversing their course. 

A famous hedge fund legend from the 1980s, Marty Zweig was famous for saying: "follow the fed". 

In my humblest of opinions, I believe we're in the early phases of a bear market here... 
Now, bear markets come in all sorts of shapes and sizes, some are swift and dramatic and some are of the slow motion downwards grinding, "Chinese water torture" types. 
Will this one be another 2008?! I have NO IDEA!... nobody knows! Nobody can tell you with absolute certainty how far down we go? or how long it lasts? 
All this will be known in hindsight once we look back on it! 

Having said that, as traders, we do not care about terminology... The actual terms "bear market" or "bull market" isn't important since we only care about trading price action, up or down... all we want is a trend to trade. In an up-trending market, most of your trades and gains will most likely be focused on the LONG side and in down-trending markets, most of your trades and gains will be focused on the SHORT side. 

**Expect to see more and more AOT trade alerts being made in ETFs(such as that XLE short we made earlier this week for example). 

At any rate, these are just some quick thoughts on the current market conditions I've seen up to now and if proven wrong down the road that this recent big pullback ends up merely being a bull market correction and the bull market resumes down the road, surely the charts will lead us down that path and we'll shuffle our feet to readjust! 

Trade the charts, not opinions! 

So the main purpose behind this weekend post was to discuss how come despite the big pullback in the last week or two, why is it that the NYMO(NYSE McClellan Oscillator) is nowhere near oversold?!  The Dow Jones fell almost 1,200 points this week, the Nasdaq fell almost 4.5%!! 
So how is it that the NYMO and NAMO are still stuck in "neutral" and not closer to "oversold levels"?! 






Now, that's a GREAT QUESTION! Does the NYMO work in bearish markets?! 

The answer is YES!!    NYMO does work and works well actually! 

However, since the tape has turned decisively more bearish, we need to look at the NYMO(or NAMO) in a slightly different angle. 

As far as I'm concerned, the more meaningful signals we're going to get from the the McClellan Oscillators isn't necessarily from looking for "oversold" readings to go long, like we did during the last 8 to 9 year bull market..... in bearish tapes, the more meaningful signals will most likely come when the NYMO overshoots into "over-bought" territory and hence start looking to increase SHORT positions. That's when this tool is going to become quite useful. Just like what we saw in late November during that very strong market bounce and the NYMO went into "extreme overbought" territory and we started to look for short positions accordingly.
 
As you can clearly see in the above NYMO/NAMO charts, the market has pulled back quite aggressively ever since early November as the bears reasserted their dominance since that "extreme over-bought" signal. 

Now, that doesn't mean that we're not going to get some useful signals when the NYMO get into "oversold" but since the tape has turned decisively bearish, the better signals will have to come on the rare occasions when the NYMO and NAMO get into "extreme oversold" and then start looking for hints of a snap back bounce(short squeeze rally).... 

The NYMO might not get into extreme oversold often, even though, the market can and and has gone down big for multiple days in a row. 


A great example of this phenomenon took place this week actually!! The markets took a BIG hit this week, Dow Jones fell about 1200 points, Nasdaq fell almost 4.5% yet the NYMO and NAMO remained in neutral and barely budged?! Weird huh?

This happens for TWO reasons, in my humble opinion... 

1: This bearish trend is taking place via ROTATION. So basically the exact opposite of the phenomena we witnessed that kept the bull market going strong for 9 years, sector ROTATION! So for example, Energy sector tanks yet the Semis bounce. The Financials take a hit one day while Retail sector rallies.... it is this type of action that makes the market go down without affecting the NYMO much. The NYMO will usually make a material move one way or the other when we start seeing BROAD BASED moves in one direction but obviously when the selloffs are happening in a ROTATIONAL manner, the broad based aren't taking place... it is this very phenomenon that kept the bull market running, STRAIGHT UP for many years and that's what's made the market so impossible to short in any consistent manner in the last few years! 

We are now witnessing ROTATION type selling, organized, controlled selling(distribution basically) without seeing much panic in terms of big mega spikes in the VIX(fear gauge).... it is this type of "controlled selling" that makes me think that we are for a prolonged pullback in the stock markets.  

2: And this second point, just comes from years and years of watching the tape and seeing multiple bull and bear markets through out the years... I have been telling AOT members in the private twitter that "in strong downtrends, the bulls control the open but the bears control the close" .... and this week was a perfect illustration of this! 



Notice in the above chart, the 5 day, intra-day charts of the SPY... notice how the market does NOT go straight DOWN.... (if it did go STRAIGHT DOWN, that's when the NYMO is most likely to get into "oversold" territory)... instead what we see is the market makes early morning or mid-day bounces, the market makes these almost pathetic attempts at rallies/bounces, usually at the open via a big gap up or early morning bounces but most of the time, these weak bounces end up dumping hard into the close..... these weak bounces in downtrends, only help to relieve oversold conditions from the previous bout of selling which only helps the bears sink their teeth in deeper just a little more each time... 

It is these weak bounces that allows for the "controlled selling" to take place... these bounces will often make traders believe that the market is bottoming which sucks in longs only to pull the rug from underneath them and leaves them sitting on failed long positions. 
All that small these small intra-day bounces end up doing is help relieve "oversold" conditions just enough from the previous bout of selling before stock prices roll over to the downside again... it is literally the EXACT OPPOSITE of what we witnessed during the +9 year mega bull market. We are now seeing this happen on downside. If you literally flip your charts upside down, it will be as clear as day light! 



This "controlled selling" phenomenon was present during the 2007 market top and thru out the 2008 vicious bear market as well... the NYMO only got into "extreme oversold" only 2 or 3 times in 2008!! 



Important to emphasize, that this does NOT mean we're in for another 2008!! I'm not claiming this at all! But we appear to be in some sort of a deeper and/or perhaps even longer stock market correction phase than we've come to get used to in recent years. Trading opportunities, on long side and short side will be abundant and many opportunities will be created for traders and investors of all sorts in due time!   


I hope you found this post helpful! 

Happy trading! 

Thursday, November 15, 2018

How To Regain Your Confidence After a Slump

Hey folks!

A fellow AOT member asked me earlier this week, "how can i recover mentally after taking several losing trades in a row?" 





As we know by now and especially after the recent vicious market downturn, losses and the act of taking losses is a "necessary evil" in trading. 

Bo Yoder, one of my favorite traders whom i used to follow religiously in my earlier years as a trader wrote some very good stuff in his book "optimize your trading edge"... he discussed that ALL trading systems will go thru a "pay-out cycle" and a "pay-back cycle".
 
The PAY-OUT cycle is when your system is winning and making money consistently
The PAY-BACK cycle is when your system is going thru a losing streak and losses are becoming more frequent. 

A trader's job is manage himself as professionally as possible thru BOTH these cycles. 


Here's the way i look at taking losses while trading: 

Needless to say, the hardest part about trading is TAKING A LOSS, closing a trade for a loss. It's hard not only because it means that you will have to incur an actual loss to your equity which obviously will decrease your account size but also because as emotional, rational, thinking human beings, as traders we all want to be RIGHT! .... Nobody wants to be wrong of course..... but as we all know, this is NOT the reality of trading! 

You have to get into head, that there's ABSOLUTELY nothing wrong with getting into a mistimed trades: 

That happens to EVERYONE regardless of experience. It's an inevitable part of this business. Trading is a business, just like any other business. 

There's nothing wrong with making "mistimed" entries in trading but the biggest mistake one can make is stubbornly REFUSING to obey the stop loss of a trade. When human ego is on the line, as traders, we sometimes do things we otherwise wouldn't do, especially when money or "reputation" is on the line. 
Again, there's nothing wrong with losses as long as they are taken within your system's or within your specific trade's game plan. 
It's much easier to recover from a 2% or 3% or 5% LOSS rather than digging yourself out of a big -20% draw-down(we've all been there, done that and we all know the horror of it).  

Recovering from a large draw-down is a challenging and frustrating. It messes with your head and creates all sorts of emotions like anger, despair, hopefulness and so on. It will affect you psychologically and affect your personal life too in some cases. 

All traders will learn this the HARD WAY unfortunately(maybe even a few times before it really sinks in) but rest assured everyone has done it and it's not fun.  

The best thing to do, I've found is to respect the stop loss, take the initial LOSS. Think of trading as a business like any other business. Every business will sooner or later have to incur a "loss".  For example, a grocery store that's carrying expired inventory, an Auto manufacturer who recalls a faulty car part or maybe even a bank that's made bad loans and now all have to incur these losses, as "business expenses".

Taking losses in trading, has to be seen as a routine "business expense". It's part of doing business we are in. 



But now comes the tricky part of this business, how can i recover mentally when i just had a disaster week and made several losing trades in a row? My confidence is shot, I'm disgusted, I'm angry, I'm frustrated and I want to make that lost money back ASAP! 

Oh boy, don't we all know the feeling of that?! 

After many years of being in this business and making tons and tons of mistakes of all shapes, sizes and colors.... I've implemented the "3 losses in a row" rule. What I've noticed over the years that for my style of trading and using my system of trading, that any time, i took 3 losses in a row, regardless if they were big, small or routine losses, i automatically know that something is wrong and i need to STOP TRADING completely. Do a "time out" in whatever you're doing and take a big step back.... The "3 losses in a row" rule forces me to sit out the ENTIRE day and not trade at all. I will shut down my twitter, CNBC and any other source that could tempt me from making a knee-jerk reaction trade.
The goal is sit out the entire and do nothing, walk away completely and do something else... once the market is closed and i feel a little more relaxed, I'll now want to see what triggered the 3 losses in a row and what could i be doing wrong? What am i missing? Is there anything that needs to be tweaked? Are the market conditions changing? Which trades worked and why? Which trades did not work and why? Have i done something different or deviated from my system? Am i being "honest" with what I'm seeing(or think I'm seeing) versus what's actually happening in the market?

Over the years, i realized that most of the time, whenever i take 3 losses in a row, it's due to a change in "market character" and my positions were caught on the wrong side of the tracks... so that requires immediate attention.


As i mentioned in that blog post from 7 years ago: Things I Learned After 15 years of Trading  : "get aggressive after you make 2 or 3 good trades in a row, get very defensive when you make 2 or 3 bad trades in a row, often times traders will do the exact opposite, self-destructive behavior". 


Naturally emotions are going to be higher than usual at this moment, so you should instinctively know that any trade you make on this day after taking 3 or more trades in a row, these trades are most likely gonna be emotionally driven and chances are high, these trades will not work out well. 

The ideal thing to do is shut down completely and walk away for 24 hours... give yourself one full day off from any trading. The market isn't going anywhere, it'll still be here tomorrow so relax, you're not going to "miss out!" 

Make this a MUST-FOLLOW rule! No exceptions, no ifs, ands or buts. 

Shut down and walk away for at least 24 hours. 

Once you've cooled off a bit and you're ready to get back in the saddle the following day(or 2 or 3 days later ideally), you have to instantly eliminate from your thinking the idea of "i'm gonna make back all my losses in this next trade!" This way of thinking is 100% flawed and is a very typical amateur thing to do. We've ALL done it before and we all know it's silly and a self-destructive way of thinking. 

Trading is a marathon, not a 100 meter sprint! 

Relax, take a deep breath. You will make back your losses but it will not happen in ONE trade, it could take several trades and that's TOTALLY FINE .... the world will not end today if you don't make back that loss from yesterday. 
This is not how professional traders approach a "recovery phase". 
so for example, the last thing i want to do is get back to my desk the next morning and go long a stock like TLRY on margin to make back the losses from the previous series of trades. This will only add more emotions back into the mix and you will make more mistakes and trading losses will pile up quickly.... 

You have to focus on rebuilding back up SLOWLY. In a cool, calm and controlled manner. 
What i like to do is come back the following day and start looking for SAFE and EASY to trade ETFs and take the next series of trades using only 1/2 size positions. I'll often focus on taking only the HIGHEST QUALITY setups in ETFs. I want to focus on doing the "small things" and getting the absolute basics done right. Waiting for the absolute best and easiest setups, my "bread and butter" setups and executing this trade properly, raising stops, booking gains. I want to focus on the basics and doing the basics right. The goal is not to "make up losses immediately".... No, that's NOT the goal right now. Right now, i need to make sure that I slowly build up my trading confidence because i know when I am doing the small things correctly and focusing on find good setups, waiting for the good setups and then EXECUTING the good setups, then this is what's going to rebuild up my confidence for the next series of trades. You'd be surprised what ONE small little green trade can do to your confidence.

ONE DAY AT A TIME, ONE TRADE AT A TIME... 


Another important point to keep in mind: traders have a "breakeven mentality" when it comes to losses. Some traders will even refuse to sell a position that going against them in a very dramatic manner simply because they just want to "breakeven" and then they'll sell it. You have to be very careful when you start catching yourself thinking like this. This will land you into deep waters and into some very painful trades sooner or later. 

Traders focus too much on PnL to the point that it hinders their progress and often times just end up trading purely based on their PnL's fluctuations and not based on actual setups and their system's trades. Totally failing to understand that if you're focusing on trading well, stop looking at your PnL, only focus on finding and executing the best setups and doing all the simple things right, the PnL will take care of itself. 



Stop obsessing about your PnL and start obsessing about trading your process, your trading system, and executing your trades well... the PnL will take care of itself.  



I hope you found this post helpful! 

Happy trading! 

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