How NOT to Blow your Day-Trading Account


140 ratings



Jea Yu

16 Feb, 2009

in Getting Started and 2 more

While traders constantly search for new and improved methods on their quest for the Ďholy grailí trading system, they often overlook the most significant element that dictates their success. This inherent element is pacing. Proper pacing means you flow with the market. When the market is running fast out of the gate, so should you. When the market slows to a crawl, so should you.

In a nutshell, have you ever made nice profits in the first hour of the trading day only to give it all back gradually throughout the day? Uh huh.

Before I delve too far into this, letís first start off understanding why pacing is overlooked. Traders tend to believe that a method should be working in all market conditions at all times. When the method doesnít produce consistent results, the blame usually falls on the method or on the trader (in most cases, the trader blames the method). From there, comes the whole back testing and tweaking process in a tireless attempt to perfect/optimize the method. With each tweak comes a success period and subsequent failure, the trader eventually will conclude the invalidity of the method and move onto another method. This continues until the trader eventually blows out or gives up. This should sound familiar to you because it happens to everyone.

A new approach has to be used. With this approach, a few premises must be inserted into oneís mindset. Write these down:

  1. A method doesnít have to always work, just under the right circumstances
  2. Not every trading day will be profitable, so donít push it
  3. If it donít fit, you must a quit, for that market period
  4. You canít control the market, only your actions
  5. The market sets the pace, you need to adapt†
  6. No method works in a flat market, so stay out of them

Iíve run UndegroundTrader since 1998 and my trading method has evolved from a simple one minute stochastics chart to a full arsenal of multiple time frame convergence charts and patterns. The evolution of the methods was completed years ago. Does that mean the methods are perfect? No. Can they be more optimized? Perhaps. However, I learned years ago that inconsistency often times is not the fault of the method or the trader. Itís the fault of the market.

What? But the market is always right, isnít it? Yes. But we gotta blame someone other than the trader this time. Lol.

Let me explain. Letís say we play a stock set up on an 8/13 min dual pup breakout with a 3 min consolidation breakout at 10:20am which results in a nice profit. This exact same set up forms again at 1:10pm. We jump in and play it again, but this time, it erodes away and then reverses down triggering a stop loss. Grrr. Not trusting this set up, we see it again at 3:20pm, but decide to stay out. Well, what do you think happens that time? Yes, the set up plays out beautifully just as it did in the morning, without us this time. In this simplified example, one could say that the method is inconsistent. However, my experience has been that the problem was not the method but the pacing. We played a set up that was successful during a fast market period and made profits. We took that same set up during a deadzone period and resulted in a loss. We didnít adapt to the proper pacing of the market. If we understood this, then we would have stayed away from the deadzone setup and played the setup in the last hour where the market once again resumes itís fast pace into the close.

The market starts off like a 40 yard dash form 9:30-10:30 am est. It then proceeds to slow down but maintains a steady pace until 11:45-12:30pm est. The markets then slow down into a sleep period which I call Dead zone until 2:30-3pm est for the final dash into the close. This is how the market pretty much paces itself every day.

Most traders can bang it out with the fast pace in the first hour but then continue to keep that 40 yard dash pace clear through the deadzone period. If a trader achieves their daily goal early, they will just Ďplayí here and there until the quantity of small stops grows, which then forces the traders to make back the losses and trade harder. If the losses mount up, they keep pushing harder racking up huge commissions in a dead market. If they finally canít take the pain anymore, they finally call it quits ahead of the last 30 minutes where the pace picks up again, only to see the prior setups play out. Usually, by then, if the trader doesnít stop, they he will up the size beyond comfort levels and drive himself straight into the abyss. Repeat this pattern three times or more a week and you have the classic blueprint of a blowout.

The fact that a trader can make profits with the method should prove that it is somewhat valid. The next step is to examine when the method is most effective. A ha! Thereís the key word, effective.

Proper pacing with the market breaks down like this:

9:30-10:30am est Ė Fast pace market - trader can play hard here

10:30am-12pm Ė Market slows down - trending forms, trader should tighten his method filters and slow down

12:-2:30pm Ė Market in Dead Zone - trader needs to leave the screens physically

2:30pm-3:30pm Ė Market starts to speed up - trader can start to look for prime setups again

3:30-4pm Ė Market fast pace dash into the close - trader lower share size and look for final trades for the day

That is the market day in a nutshell. There will always be exceptions, but donít focus on those. Exceptions are illusions meant to suck traders into a false paradigm. People play the lottery to be the Ďexceptioní even though the odds of winning are ridiculously against them. Exceptions are for losers. When they happen, you accept them for what they are and revert right back to the norm.

I personally feel itís easier to pace oneself when itís done as a group. This is one of the key benefits of having membership in our trading pit. Every day, I constantly reinforce the pacing element by physically calling breaks through deadzone and instilling some Ďtough loveí on members that arenít pacing. We practice what we preach. The biggest enemy is usually boredom, but thatís a cheap trade off compared to the abyss and a blown out account.

Remember that making the profits are not the hard part, keeping them is. Proper pacing will help you keep the green!

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Good one mate. Very informative

Sep 12, 2013

Member (139 posts)

Re: How NOT to Blow your Day-Trading Account

Thank you mr Yu, for a great article. Appreciate it :O)

Sep 12, 2013

Member (18 posts)

You are spot on in this article, nice piece.

Jun 24, 2009

Member (12 posts)