Don’t Average Down

One of the things I have learnt recently is to never average down.

It may work for others, but I know it will not work for my own style of day trading.

I’ve averaged down in the past thinking I could make even more when the price eventually moves back in my favour, but it almost always ends with big losses, leading me to get even more emotional and sometimes even revenge trading.

Very bad. Very very bad.

I trade based on short-term trend, and it’s quite apparent after 1 or 2 candles whether my trade is going to pan out or not.

So therefore, nowadays if it looks to me like the trade isn’t going to pan out, I’m just happy to get out at my stop-loss and move on to the next trade.

I may decide to average up a little if the trend is moving well.

But average down? Nope, never again.

Things I Hate And Their Actual Loss Value

There are many things we probably hate about day trading. Things that stand in our way of successful trades.

It’s just the nature of the beast.

If day trading were so easy, everyone would be highly profitable by now.

But if I were to really analyze it objectively, there are things I hate which don’t actually result in any losses, and things I hate which result in HUGE losses.

It ranges across a spectrum.

And the trick is to avoid the things which result in huge losses.

Things I HateActual Loss
1Seeing a stock shoot up but not having a position in it as it did not fit my criteria.ZERO
2Not finding any good trades to trade in a day, because none of them fit my criteria.ZERO
3Jumping into a trade just to make a quick buck even though it did not fit my criteria, only to lose the trade.MODERATE
4Entering into a trade because I tried to anticipate a perfect setup, but losing the trade because the perfect setup did not materialise.MODERATE
5Not stopping after making multiple losing trades, i.e. not setting a cap on daily losses.HIGH
6Revenge trading – Getting over emotional over losing, and continuing to trade until I get to breakeven, but eventually blowing up half my account.HIGH

When you look at it this way, items 1 and 2 don’t seem that bad after all.

Sure, it doesn’t feel good to see a stock shoot up when I decided not to trade it. And it doesn’t feel good when I wait a whole day but can’t find any good trades to get into.

But you actually lose NOTHING if you don’t trade. And that is any time better than losing hundreds or thousands of dollars on trades you could have avoided.

Focus On Technique, Not On Profits

Michael Phelps has one of the most beautiful butterfly techniques ever, which is a big reason why he was so good.

One thing you have to learn as a competitive swimmer is that technique is everything. Once you master the technique, the speed will come naturally.

The majority of your time and efforts should be on perfecting your stroke.

In the same way, I believe that for day trading, you have to focus on perfecting your execution and not so much on your P&L.

Obsess about adhering to every single step of your trading plan/strategy.

Obsess about risk management and minimising your losses.

Obsess about not jumping into a trade too early.

Obsess about keeping your emotions in check regardless of whether you win or lose.

Granted, your trading strategy should be a winning one (i.e. have an edge), and once you’ve found that – which I don’t believe is a difficult thing to do – it is then up to you to aim for perfect execution.

And once you master all that, I believe the profits should come naturally.

I’m definitely not there yet, but I’m working hard in the hope of getting there one day.

Two Ways To Lose

I’ve had many days where I lost much more than I should have on a trade (or trades), and I absolutely hated myself after that.

Therefore, I have made a conscious decision to lose as little as is feasible on every trade I make.

The way I see it, if we want to make it really simple, there are basically just two ways to lose a trade:

  1. Lose small: Lose the amount equal to or less than your stop-loss.
  2. Lose big: Hope that the trade will rebound and when it doesn’t, you end up losing way more than your intended stop-loss amount.

As I trade momentum on the 5 minute timeframe, it usually becomes quite apparent after 5 or 10 minutes if my trade is going to work out.

And if it looks like it’s not going to work out, I’m happy to just get out of the trade for a small loss.

Let’s put it this way: If you’re going to lose on a trade anyway, would you rather lose $300 or $80?

Of course, there are times when I get out of the trade and it changes course and ends up being a winning trade. Yes, that has definitely happened before, and it doesn’t feel good when that happens.

However, (a) it doesn’t happen all that often, and (b) I would much rather have lost $80 on a trade that might have ended up being a winner, than lose $300 on a trade that eventually didn’t pan out.

It plays on your emotions, and I have realised that small losses are always better for my psyche than big losses.

One of my big mottos in day trading is “Let your losses be as small as possible”.

Nothing wrong with taking a very small loss on a trade and then realising you aborted too early. At least you’re still preserving your account, and there will always be other better opportunities down the line.

It’s your choice. You decide what works best for you.

Hit And Don’t Get Hit

I just watched the UFC Heavyweight title fight today between Francis Ngannou and Ciryl Gane.

I thought Gane fought great and did well not to get knocked out by Ngannou, but he just wasn’t prepared for Ngannou’s unexpected ground game.

We all know Ngannou has one-punch knockout power, and he can destroy you in a split second.

All it takes is one swing for Ngannou and it’s lights out for you. Game over.

In the same way, I treat day trading as if it’s a fight against Ngannou.

The stock market is a beast, and it can destroy you if you make just the tiniest mistake.

You can’t afford to make even the slightest error. You have to be 100% on point, following your strategy to a tee every single time.

If you get sloppy, the market will destroy you.

If you get greedy, the market will destroy you.

If you get emotional and revenge trade, the market will destroy you.

Always be extremely careful, and always know that you are playing a very dangerous game and can be wiped out at any moment.

It’s like what they always say before a fight: “Protect yourself at all times.”

Maximum Two Losses Per Day

I have a personal rule: Walk away after two losses per day.

Not that I have been able to follow it often, to be honest. I’ve broken the rule many times. I always think one of the following things to myself:

  • “I’ve been really unlucky today. I’ll just do one more trade to get back on track.”
  • “Maybe I’ll just jump in here for a quick profit – even though it does not fit my strategy to a tee – just to feel better about myself.”
  • “I just want to get ONE win today. Reduce my deficit by a bit. Then I’ll log off.”
  • “I know I can do this. I’m better than this!”

It took me a long time to learn to walk away after two losses in a day.

It sounds like an easy rule, but for me it is soooo hard to do.

I’ve only recently been able to walk away after my first two trades were BOTH losses.

Major milestone.

It has to do with ego. It has to do with our repulsion at ending the day red. It has to do with our desire to make at least some profit every day (which is impossible, by the way). It has to do with our need for validation, to know that we haven’t lost our trading mojo. It has to do with that deep feeling of unfulfillment at making a loss.

But trust me, in the long run you will lose a whole lot less by capping your losing trades to just two a day (or however many you feel is a good cap for yourself).

Losses are inevitable. It’s how you handle your losses that make or break you as a day trader.