Picture this: the ability to make a living from the comfort of your own home as you crack open an IPA and press buttons, wearing nothing but underwear.
Many are intimidated by the negative headlines that are spewed around the internet, and yes, there’s truth to that. About 90% of “day traders” fail and eat dirt. This is because they don’t manage their risk properly. Funnily enough, those who tell you it can't be done don't recognize that failure is part of the equation to succeeding. It's something that must happen, and those who think otherwise often fail and quit. The 10% who succeed? They stick with it. There will be failure in a lot of things you do in life, and trading stocks is one of those things. In this game, you must be comfortable with being wrong. I'm TELLING you, it's okay to be wrong. Trading is not something many are naturally good at. What you lack in natural ability, you can make up for in taking the time to educate yourself. You see, it’s not the chart patterns and the technicalities that are difficult to overcome, it’s the risk management and the emotions that one must hurdle over.
Every trader loses money; it’s part of the game. You can cry about it, but at the end of the day the MARKET will win.
However, you can still limit your losses, how much the market beats you by, and how often you lose. This is called risk management. You manage your risk on how much you put into your bet. That means don’t YOLO your account! (unless you frequently visit r/wallstreetbets).
One popular method used is called the 2% rule; don’t risk any more than 2% on any given trade. This means using things like stop losses, which get you out of the trade at the said price. Pairing the stop-loss function with a good risk/reward system can help you establish exit points on your profitable trades. For example, assuming a 2:1 risk/reward-ratio, if you are risking one hundred dollars, you should be looking to make two dollars if the market goes your way and lose one dollar if it doesn’t. Sounds easy enough right? Well, those with poor risk management might just throw half. If they happen to lose then they take a huge blow to their account and have lost more than the person who only risked one dollar.
Now if you’re thinking “screw that, it would take forever to make money!” you’re right. That’s the point. You minimize your losses until you actually get a feel for what you’re doing. You’re not just studying for your health. You’re trying to become the next Jesse Livermore, dammit!
Once you get a better idea of what you’re doing, wouldn’t it make sense to slowly increase your risk? There’s nothing wrong with paper trading, or trading with fake money. Once the stage fright goes away, maybe you can dip your pinky toe in the deep end.
Here’s an unprofessional example of a moderate risk management plan:
Losers (The percentage you'd lose in a trade):
- 2-5%: Very small paper-cut loss. Many algorithms will fish for a stop-loss hunt to weed out traders with small stop-loss limits.
- 10-20%: Small loss, can cut quickly if that’s your plan. (Even then, 20% is what I would personally consider a big loss.)
- 20-30%: A controlled loss most of the time. Trust your knowledge but if the wound is that deep GTFO. I'd bleed out with this kind of loss.
- 30-50%: More of a gamble. So if you’re gambling on the odds of it going up, it might not be the best idea to risk more than this if you can tolerate it. Imagine being down half your money and holding because you think the price will go back up, not for the faint of heart.
- 100%: A lottery pick. 100% returns on your money and you're off to Peter Lugers. Conversely, losing all of your money and it's mustard sandwiches for the next year.
Learn to not just PRAY for the price to go back up. Cut your losers quickly and move on. Forget about her. She doesn't love you back.
Winners (The percentage you'd win in a trade):
- +15-20%: A great spot to take consistent wins.
- +50%: Take the profit you fool! Your money is performing ten times better in equities than collecting dust in savings.
- +100%: It's doable. These 100% gainers happen weekly. Why would you not cash out at this percentage?
- Scaling out of your position for 30% → 50%→ 100% → ??? withholding the rest if you’d like; slowly exiting your position at a certain percentage that way you can guarantee profits. This means you can start to take a percentage out of your stock holding to sell. You can't go broke scaling out of a strong position.
- Lottery tickets are high risk, high reward tickers that are the difference between buying your family holiday presents and being a troll under the bridge.
This strategy just gives you a system to follow. Systems are good, they help you make money and mitigate losses. It’s the technicals of a stock that decides risk, which then decides the size of your account being put in. Size does not decide how much or what you will risk. Gentleman, it’s okay to have a small size. We are growers, not showers. Your wins should cover your losses, and that can be applicable through developing a strong system with guidelines you follow.
In 1983, legendary commodity traders Richard Dennis and William Eckhardt held the turtle experiment to prove that anyone could be taught to trade. If you’d like to learn more about this experiment and how it went, check out it out here.
When it comes to emotions and trading, they simply can’t coincide. I’m not a master of psychology and I still struggle with this, but you must be surgical in your execution: clean, precise, exact, no sloppiness, no shortcuts, and no emotions. Turn into Bill Belichick, actually.
Many often analyze technical moving averages in search of an entry and an exit. It’s just not that simple though. A more experienced trader might study these averages to help unfold psychological shifts in market sentiment so that they can perform a low risk, high probability trading scenario.
I’ve been sorting through guidelines and these are rules I found to be the most helpful:
- Preserve capital; save dat money.
- Plan your trade and trade your plan. Risk more when the odds are in your favor, and not just because you have a gut feeling. Intuition makes powerful traders, but to rely solely on it can be dangerous.
- Be disciplined; if you have to ask whether it’s too late to get into a stock, the answer is yes. If you feel like breaking one of your rules, see the first two bullet points.
- Please, don’t use the money you’ll need for groceries. Use the money you’re willing to spend on a night out at the bar with a date. Money you wanna burn!
- If you are trading emotionally or randomly, stop, take a walk, and try it again. This time without the extra chromosome.
These rules have kept me in line from making too many stupid mistakes, and they’re now tattooed to my forearm. Jokes aside, everyone makes mistakes, the key is in limiting them. Would you rather get a paper cut or lose a limb? I’m not telling anyone to quit their jobs and eject themselves from life to be a day trader. What I am saying is that it’s very possible, despite an incredibly long and difficult learning curve. The reward and financial freedom makes it all worth it.
I’m by no means perfect, but every day that passes is an opportunity to suck less.
If you’re serious about this, I would recommend an audiobook on youtube called Trading For A Living. It's a good listen for anyone looking to get started.
**Not a financial advisor. Articles are opinions only. I’m just a dude pretending to be a Netflix character.**
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