No one knows when the next momentum stock will appear in the stock market. You could have three A+ setups in an hour, or you could have nothing to trade for a whole week. But it is your duty as a trader to put yourself in a position to capitalize when the opportunity arrives. In order to be in the position to capitalize, you have to preserve your physical and mental capital throughout the trading day.
If you hit your max loss at 9:45 AM, you are not going to be able to capitalize on the setup at 10:30 AM. In the video below, we go over how you can get by from taking small losses, while hunting for that gold mine trade that will make your daily goal in one trade. $SAEX provided us with this on Monday, giving us an easy go lucky consolidation setup for an entry on it’s second run up on the day:
Preserving Mental Capital
As a day trader, you need to have a daily max loss to protect your physical capital. But you also have to preserve your mental capital so you can capitalize on your setups throughout the trading day if they present themselves. When you take boredom trades, you don’t just waste your money. You burn your mental capital. Your focus, your energy, and your patience. You become emotional because you know you are taking trades you are not supposed to, and you get frustrated at yourself because you are being undisciplined.
When you deplete your mental capital, you start making worse decisions. When you are in this state of mind you will need to leave the computer to avoid the temptation of trading when you are having an off day. When you are forced to stop trading for the day, you may miss big opportunities. It may result in your missing an opportunity like SAEX.
A component of trading momentum stocks successfully is buying or shorting the correct number of shares. You should be assessing your risk based on the quality of the setup in front of you. You should know how much money you will risk before buying or shorting any stock. You should also risk in proportion to what your max loss is. You don’t usually want to be risking your whole daily max loss on a single trade. For example, if your daily max loss is $500, you don’t want to risk $500 on a single day trade (unless the setup is A+ and you have a ton of conviction). Instead you want to be risking 100$-200$ per trade or 1-3% of your total account size. This will give you more opportunity to exercise your edge on a given trading day.
When you are trading something as thin and illiquid as SAEX, you have to size appropriately so you don’t get emotional. Thinner stocks have bigger spreads, which means you will have bigger PNL swings, and also get more slippage on your entries and exits. You can waste a lot of mental capital by trading too much size on a thinner name like this. It will make your position in the stock a lot more stressful than it needs to be.
SAEX didn’t have the flag breakout until 2PM. This setup is the perfect example of the importance of preserving your mental and physical capital throughout the trading day. If you hit your max loss early in the day on Monday, you would’ve missed this move. Day long consolidation plays are some of the best late day setups. But you have to trade well and be disciplined in the morning to put yourself in a position to capitalize on a play like this.
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