Allowing day trading losses to eat up your profits is probably the most common mistake that newbie traders make. So, if you're in that boat right now, then the good news is that you're not hiding your head in the sand about it. You recognize it's a problem.
No one likes to lose a game. But, losses happen. I don't care how good your strategy and your discipline, you are going to make some bad trades. The trick is knowing what you're going to do about it.
I've talked about having a sound day trading strategy under the strategy section. As I've mentioned, a good trading strategy gives you criteria for exiting the trade. Entering the trade is one thing. But you need to know what to do when that trade goes against you.
Some traders draw a line in the sand and say "I will not allow my day trading losses to exceed 2% on any one trade." Others say "Never allow your day trading losses for one day to exceed 5% of the total equity in your account." Both of those ideas are good guidelines, especially for the newbie trader.
Here's the basic idea. You never want to lose so much that you cannot play the game tomorrow. The problem is that some newbie traders (and experienced traders too) are a little bit mule-headed. I'll be nice and call it stubborn. So, when a trade goes against them, they refuse to sell. They let the trade go down the pipe, and their equity gets flushed out with it. Then what happens? They hold a little longer because they just know it cannot keep going down - except that it usually does. So, instead of having a plan for preventing major day trading losses, the newbie trader does nothing and just lets the losses mount up.
No one likes to lose. And therein lies the problem. When you sell a losing trade, you're admitting you make day trading mistakes. If you make mistakes, then you're not perfect. If you're not perfect, then you beat yourself up for it and you loose confidence as a trader. So, you're better off just denying the mistake. Right?
Wrong. Day trading mistakes can rise up and bite you.
Let's say, for example, that you make money on 3 out of 4 of your trades. So, your winning percentage is 75% - that's very good by the way. Next, let's assume that your winners generally make 1.5% gain per trade - not bad either. But your losers average 5% - not good. Well, if you total up the math, then you see that your net loss is actually .5%. So, even though your win vs. loss ratio is pretty good, your losers are eating your lunch. Not good. You can trade for a while that way. But you're just treading water.
When I was a kid, I remember saying the following quote. I'm not sure of the original author, although it might have come from a WWII poster. But it captures the important truth regarding day trading losses:
So, if you're a newbie trader, or an experienced one, resolve now to decide upon a limit for your losses. These can be mental loss limits or real ones that you program into your trading platform, but resolve now to stop taking these losses.
Personally, instead of using a set loss limit on my trades, I use technical indicators. And I have certain guidelines in my trading strategy. Here's one that I use when trading gap down stocks. When looking at the 10-minute chart, if the 2 Simple Moving Average crosses down through the 4 Simple Moving Average on a long trade, then you get out of that trade.
This is my experience. Once a trade goes against you, it will continue to go against you. So, you might want to look at taking your day trading losses and converting them into winners by trading the same stock in the opposite direction.
Here are a few tips. These are things that my chat room members hear me say all the time:
1. Partial exits and movable stops. Some of the worst losses occur when your account was showing a profit and then it converts to a loss. The psychological impact of that is tough. It's difficult to get our minds around the change. We don't accept it. And that makes us dig in our heels even more.
2. Don't let a winning trade become a losing trade. This is similar to the first point, but it just states it in a different way. Even if you don't take a partial profit exit, then at least place a break even stop on the trade once it shows some profit. This is a bit more tricky with day trading than with swing trading, but it's still a good rule.
3. Don't let a day trade become a swing trade. In other words, if you entered a trade with the intent of it being a day trade, then don't let a loss convert that into a swing trade...unless, that day trade was based upon a swing trade analysis from the start. What do I mean by that? In the chat room, I talk about "contextual longs" and "contextual shorts". A contextual long has swing trade support. By nature, these are less risky trades as long as you trade them in the direction of their context. So, you would only day trade long a stock that is already a contextual long. Just don't get sloppy with this. The intent is still to get in and out of that day trade on that same day.
4. Know "the basis for the trade". This phrase is important. For example, if the basis for your long trade is that price is finding support at a certain Pivot Line, then a break below that support means the basis for your trade has been violated. If the basis for the trade has been violated, then why are you still in it?
I hope these ideas help with your trading.
Here's another article I wrong dealing with the same issue. It also includes a video:
Day Trading Losses .
You can limit your losses by knowing more about Support and Resistance. Make better entries and exits by improving your technical analysis of the charts. Get Bob's FREE 6-part video course on Support and Resistance by clicking HERE.
One of the webinars I did in 2008 included a reference to The Two Twelve
Ways to Lose Money in the Stock Market. You might want to print the
page and hang it by your computer. If you didn't catch the YouTube
version, there's a link to it on the "About Bob..." page. But here's
the link for the "Top 12" list:
The Top Twelve Ways to Lose Money in the Stock Market.
To read more about day trading losses and "failing at day trading", then click this link.
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