Saturday, October 08, 2005

When I Turned the Corner

I got into the market in 1998 after getting married, and soon I was watching the market quite closely. I didn’t have a lot of money to trade with, but I was eager to learn and grow the modest nest egg we started with. CNBC became part of my morning routine before I left the house each day. In the evening, I would update my TC2000 charting program and begin to look through many charts, hoping to find two or three that looked promising. I did well trading breakouts and momentum plays, as the market was ripe for such a trading style for the next couple of years. This evolved into a passion for trading, and when the time was right, I decided to make trading my full-time job.

The first day I became a “full-time” trader, I placed 4 day trades and made $1006.00 after commission. I was so excited! My 4-point winning trade on the short side of GENZ with 200 shares made my day, and I was convinced that soon I’d be very wealthy. After all, it wouldn’t be long and I’d be stepping up my trading size and imagine what a better trader I would be by then! If I can make a comma ($1,000 or more on a trade) my first day, I couldn’t wait to see what results I’d be getting 6 months later.

Then reality set in.

I did remain positive in my trading account, and fortunately did not ever slip into the red. That was truly a blessing, as I didn’t ever want to have to fight back to get even. But what did happen was that my account stagnated. I would make money with a good stretch of trading, and then I would struggle and give back profits with the tough trading stretches that are bound to occur to all full-time traders. My strength has always been discipline, so where was I going wrong?

As time went by and I evaluated many months of trading results, I began to notice what I had initially missed. I wasn’t managing my losing trades very well! It was not an issue of large and staggering losses or standout hits to my account which had cost me. It wasn’t a matter of being able to admit when on the wrong side of a trade. Instead, my ratios were off. I was offsetting good winning trades with losers of similar size. Overall, my account was bigger, but I wasn’t making much real progress.

Following this initial discovery, I had to dig a little deeper. What was my win/loss percentage, and what should it be? What was my risk/reward ratio, and what did I want that to be? A closer look revealed that my ideals and my reality were different, and I had to get them more in line with each other.

My trade sheets for each trading day show the symbol, entry time and price, exit time and price, and gain/loss for the trade. By adding up and averaging out many months of these trade sheets, I noticed that it wasn’t my win/loss percentage costing me money, but rather my risk/reward ratios that needed adjustment. I was right more often than wrong (although still wrong plenty), and I was cutting my losses at acceptable levels. However, I wasn’t staying in my winning trades long enough to more than offset the losing trades I was bound to make. I was taking profit too quickly. Many of my winning trades kept moving in the direction I had traded them, but I was only getting a fraction of the move because I was unwilling to endure pullbacks and give them time to continue working.

By realizing that my winners could be much bigger if I did not allow myself to take profit so quickly, the opportunity for account growth became much more real to me. I adopted a 3:1 ratio at a minimum for profits vs. losses, meaning that I expect to make at least 3 times what I am willing to risk on a trade, or I simply will not take the trade. Now, not all of them worked out as planned, but by keeping my winners larger than my losers, I began to book profits very consistently, month after month. This added capital to my trading account, but just as importantly, it added confidence to my psychological capital, which is such a necessity for successful trading.

The Stock Bandit


Blogger TraderEyal said...

These insights into the process of becoming a successful trader are awsome. Thanks for a good read.

2:38 PM  

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