Trading on Borrowed Time - Part 2


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Jea Yu

15 Sep, 2008

in Getting Started and 1 more

This is the second part of Jea's article entitled Trading on Borrowed Time. The first part is available here.

Most day traders are going to blow out their accounts, they just don’t know it yet. The same applies to almost every new trader entering the game. They are all on borrowed time, a disaster waiting to happen. It’s a gloomy picture, unless they take the right steps to prevent the impending disaster. The initial goal of trading is to diffuse the bomb before it explodes. It’s not about making money. This is what traders don’t realize until it’s too late.

The only way to diffuse the time bomb is by slowly building a foundation of knowledge and experience so that you will be properly equipped to handle all situations. I see newbie traders all the time that get lucky starting out in the game. They over leveraged and made some quick profits. Instead of using that money to properly buy time and set forth to learn the methods, they jump right back in for more fast money. When they eventually get tagged with some big losses, they have no real foundation. The only thing that worked for them was taking large over leveraged bets (which put them in the hole in the first place). From here, they will either put on the brakes and set forth to learn, or go even heavier to recover losses and end up blowing out their account.

It’s no wonder day trading is often considered gambling. Most traders are gambling. That’s what happened during the internet bubble. With the popularity of poker, the world now knows what the pros have known all along. Gambling is not gambling in the long run. There’s something very real and tangible that separates the pros from the fish (everyone else). The same applies in trading. Gambling is a 50/50 proposition with no edge. Speculation implies at least 60/40 leaning towards an edge. The latter is what consistently profitable traders have embraced.

Every trader at some point ends up in the abyss. They violated their own rules of trade management, setup filtering and size allocation. In full desperation, they leverage heavily into a Hail Mary trade. Against all odds, the miracle trade plays out and the account recovers. While the trader may consider this a gift, he will eventually find out that it is a curse.

What to do when you get that miracle trade:

1) Acknowledge you got lucky, admit it was a gift (like a Trojan horse)

a. the market doesn’t give you money for no reason, it expects that money back and MUCH more

2) Put yourself on probation by taking a self imposed hiatus for at least one trading day to get your mindset back to normal

3) Start back up trading smaller size with tighter filters, revert back to your foundation. The goal here is not to make money, but to replenish confidence levels steadily. If the overwhelming need to ‘make back’ losses causes you to over trade and make large size trades again, then go right back to step 2.

4) End the trading day early and on a small profitable trade if possible

Be aware of anytime you step over the ‘line’ and control yourself by simply walk away before you fall into the abyss

Negative Reinforcement
If you want to lose weight, what would motive you more…staring at a picture of an obese guy or a champion bodybuilder?

Chances are you chose the fat guy because that’s how you don’t want to end up. The same applies to trading. Negative reinforcement uses fear to prevent you from the worst-case scenario.

It’s an effective constant reminder of what you shouldn’t do. It’s also very easy to apply. Print out the trade blotter and profit/loss statement for one of your worst trading days (everyone has them). Tape that piece of evil right under your monitors so that you see it every trading day. That is the abyss. Take a good look at it every morning as you reboot your computers. Identify with it. Feel the sting… ouch. That’s what you don’t want to repeat today!

Band Aid or a Cure?
Taking a break from the action is only a temporary band-aid. If you haven’t built your foundation of knowledge, it’s just a stay of execution. You are still on borrowed time. All you did was just add a little more time to the clock. If you don’t take the time and make the effort to build a foundation, you will once again find yourself in the abyss. Remember, the faster you make it, the faster you lose it. Slow, boring, steady progress is the key.

Gauging the Market Trading Conditions
Please note that I am referring to the trading conditions, not the market index gains or losses. A strong or weak market is irrelevant to a trader. A tradeable environment is composed of follow through, trading channels and liquidity. Don’t mistake a market being up huge or down huge as a tradeable market. Sometimes they do overlap but not always. The best litmus test is to take your best setups and see if they play out. If they fail back to back to back, then it tells you the market environment is not fertile. Don’t punish yourself for this. It’s not your fault. The only actions you need to take are to preserve your capital and your confidence levels which means quit for the day.

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Re: Trading on Borrowed Time - Part 2

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Aug 26, 2014

Banned (1 post)

All points agreed

All your tips are right on the moneyÖ..literally! I just donít get the Boredom comment? I LOVE trading and never get bored, everything about it is interesting and exciting to me. Maybe thatís just me, but I think if you get bored with this then you shouldnít be doing it. Perhaps thatís why Iíve been doing really good in my trades. The fact that I enjoy it and Iíve got a knowledgeable trader that has taught me the ropes keeps me from getting bored. Anyway thanks for the article.

May 03, 2013

Member (1 post)

Re: Trading on Borrowed Time - Part 2

I'd be interested in hearing the authors views on which markets are easiest for a private investor to beat. I have traded pretty much everything over the years and find the major FX markets impossible to beat, no matter how much research I do. I've come to the conclusion that the Gold market is completely rigged by the major Central Banks. The one market in which I have an edge is single stock shares, where value can be found by doing the research.

Apr 06, 2013

Member (6 posts)