Let’s go off script today. This discussion is based off the webinar and emails that I have received. First let’s talk about losses.
Embrace Small Losses
Some of you are having a hard time dealing with losses. To become a successful trader, you MUST be able to deal with losses. This is not exclusive to stocks. The best baseball players do not get on base 60 percent of the time. The best actors have movies that flop. The best doctors misdiagnose. The best attorneys lose cases. The best hand in poker, pocket aces, loses around 20 percent of the time. There are very few professions where you are right 100 percent of the time. It is just magnified in trading because your money is on the line with every trade.
How do we deal with losses? We take the sting out of them by managing our risk. No loss should ever account for more than 2 percent of your trading account, and that is a very aggressive figure meant for small accounts that can afford to be “blown up”. I generally stay between .2-1 percent. When the market is overbought or oversold, I generally lower my risk to under .5 percent. That is what I did today, and it’s why 3 losses had little impact on me or my account. The three trades basically wiped out 1 of my average trades (see spreadsheet).
You need to learn to embrace small losses. Never move your stop. Never think to yourself, “I know the stock will bounce back if I exit now, so I’ll just move my stop down.” That is a losers game. It’s how small losses with little impact on your accunt snowball into devastating losses. Take your loss and pat yourself on the back. That’s right, reward yourself for playing the game correctly.
What to do when the market corrects
No matter what anybody tells you, nobody knows what is going to happen going forward. Read what most of the successful and smart traders are saying. They are talking about protecting capital, watching how things play out and having your ducks in a row for when things become clearer. It’s the charlatans and pundits that make predictions and act as if the know. The successful traders have a game plan moving forward, taking into account the different options and probable events that could occur.
In this situation I like to take stabs at different setups until I find something that works. I manage my reward to risk very closely. I usually up my required ratio from 2:1 to 3:1. I also lower the position size. I have a basket of stocks that fit certain setups that I could see playing out. Right now, I am watching for stocks with the following setups:
1) get extremely oversold and near major support for bounces (rubber band setup)
2) stocks and sectors that are holding up well (possible rotation or new leaders)
3) stocks that reverse off big down days intraday (hammers)
4) Select shorts
5) Pullback shorts (bounce to resistance after big drop–often was a rubber band trade)
That is the game plan. I am going to watch for stocks setting up within these 5 setups. Any entries in the coming days will be on decreased position size. These trades will likely be more speculative “stabs” in nature.
I am behind due to the post-market webinar and appointments, so I will have them ready for you pre-market. I doubt there will be any trades to be made tomorrow, but it will be good to have the basket of stocks ready.
I was stopped out of BLWD, FANG and YY (BLWD and YY were also entered today). I took profits in MUSA. I am still holding DUG.
You should have received alerts with charts and information related to these trades.
I also went short AAPL. This was based on the negative divergence setup I talked about last night.
Expect the rest of the report tomorrow morning.