As traders, we are forced to compete in an environment where we almost never have an advantage. It is one of the most cutthroat and hostile places to work and make a living. Which could easily explain the extremely high failure rate amongst those in our profession. But, knowing this shouldn’t discourage you, unless you are uncomfortable with taking risks. It is a place where only those with an entrepreneurial spirit can survive. You truly eat what you kill, and if not, you will be eaten. Only those with years of experience and knowledge and those who work in teams tend to survive.
If there is anything you might have learned about trading or the stock market by now, it is probably that it is volatile. It is changing, evolving, living and breathing. It reacts emotionally, logically, illogically, rationally and irrationally, just like a person. The stock market, despite all of its constraints and regulations, does NOT play by the rules and is not rigid or predictable. And as traders, we can’t be either. This job is not as simple as fitting a square peg into a square hole, day after day scenario. It is not black and white. But, there is good news, great news in fact. Simply understanding what you are dealing with puts you so far ahead of the retail newbie, you would be surprised. As a stock market and trading educator, I make it one of my top priorities to stress a handful of simple tips and tasks for traders that will help them beat the odds in the long run.
You MUST Keep A Trade Log
Just because your broker tracks your trades and profit/loss statistics, does not mean you know your stats as a trader and does not mean that you are keeping helpful statistics. Knowing your numbers, like any business owner or entrepreneur is critical to your success and to your bottom line. Have a trade blotter that tracks every trade in detail, including the type of setup or pattern you traded. At the end of every month, you can go back and look to see what worked for you and what wasn’t working. Focus on the winning strategies and take what the market gives you. Here is my trade log from February for example. Click on the spreadsheet to see what I like to see in a trade log.
Your Strategy and How To Adapt it to the Market Environment
So, if you are following the rules laid out in the industry by other successful traders, by now you have your written trading plan, which is basically your business plan, your model. And, you also have your trade log. Looking at your trade log, you should easily be able to track the strategies that you trade, and know what is working for you and what isn’t. Beyond good risk management, you need to be flexible and able to adapt from here. In my own trading, I have had experienced smaller gains and more failed continuations in my trades than in previous months. I attribute this to the market choppiness and volatility associated with oil prices, the change in strength of the dollar in recent weeks and the constant speculation surrounding the imminent raise in interest rates as quantitative easing winds down.
In order to stay profitable, and continue making positive gains going forward, I have reviewed my own statistics and arrived at one conclusion. Take profits sooner. I am a swing trader and day trader, but my background and true expertise lies in swing trading. However, the market is forcing me to evolve. I can tell you that 90% of my swing trades are profitable by the market close on day one of the trade. That number drops to 60% for day two of the trade. By day three, for the past month alone, profitability drops just below 50%. So, while we are still seeing trades move up and continue trending, we are also seeing huge drop offs in the numbers of trades continuing to make profits day over day. What does this tell me? In my case, it tells that I am seeing the ball really well and that my identification of trigger spots and trade entries is at 90%. But, due to market volatility, trade continuation becomes more difficult. How do I adapt? Knowing that 9 out of 10 trades I take will move up from my entry price the close of the first day of the trade, it means that I can afford to take bigger size and profit quicker, intraday. Traditionally, my strategy involves scaling and scaling out of positions over the course of a few days. However, since the market isn’t giving us a few days of continuation in many of these trades, I will simply adapt and move to profit sooner, on the first day, by taking largest size. I will keep my last quarter size of my original position for continuation the next day, and add back to my position as the trade allows.
The value of keeping your own statistics and trade data has never been more obvious to me than right now. By making a very simple adjustment to my trading strategy, and by knowing and understanding that the market, at this time, isn’t the most cooperative, I can make an easy change to stay profitable and on top. I hope that more traders, especially my students and those who trade with us at Warrior Trading are also adopting similar adjustments. It is the nature of the game to evolve, and as heavily disadvantaged players, we MUST adapt or we will fail to survive.