From the first day, I realized that risk management had to be a top priority if I wanted to succeed in trading. Let me give you some background on myself. I am not a twenty-something trader looking to make a quick buck. Trading under the “no risk it, no biscuit” philosophy is not for me as it is stressful and goes against my nature. I prefer to take small risks and gain larger profits than what I put on the line. With a wife and child at home, I’m not willing to risk everything. Therefore, I began my trading journey in penny stocks in 2016, where I learned valuable lessons on risk management.
My very first rule and one that I still follow today is designed to stop negative momentum against my account. The rule is simple yet effective: 2 losing trades, done for the day. 2 losing days in a row, done until you figure out the problem. This rule can be modified to fit your trading style or frequency, but the idea remains the same. Trading involves hitting two moving targets – the overall market and your mind. If one of those factors is off and I have two losing days in a row, then I sit on the sidelines until I figure out whether the problem lies with me or the changing market conditions.
Following this rule alone can save you big time. It’s like a circuit breaker that stops everything until you figure out the problem. Fortunately, it usually boils down to two factors: the overall market or your mind. If the overall market is causing issues, you can look at your technicals and setups to see if they need to be updated or shelved. For instance, it’s hard to play breakouts in a bearish or choppy market. So, you may need to update your system to say, “if the market is bearish or choppy, don’t trade breakouts.”
The second factor is your mind, which can be slippery. If you are trading within your system and your ideal setups match up with what you want the markets to do, but you’re still on a losing streak, then it must be something with your attitude, mindset, or psyche. Have you been keeping a journal? If so, go back through it and see if you can identify something that stands out. Are outside life events creeping into your trading? Are you lacking sleep or exercise? Examine everything from top to bottom. If you are not keeping a journal of your thoughts, feelings, and emotions with trading, then start one. It can help point out the problem during personal downturns.
When it comes to trading, it’s essential to prioritize keeping a healthy mentality. Personally, I have never been interested in trading recklessly or chasing quick profits because I find it stressful and it’s against my nature. My goal is to minimize risk and make larger gains. I started trading in the penny stock world in 2016, and it was a great place to learn about safety and defensive trading.
My first rule was designed to prevent negative momentum against my account. The rule is simple: two losing trades, done for the day. Two losing days in a row, take a break until you figure out the problem. You can modify this rule to fit your style or frequency of trading, but it is crucial to adhere to it. When trading, you are trying to hit two moving targets: getting into the flow of the overall markets and your mind. If one of those factors is off, and you have two red days in a row, then you need to sit on the sidelines until you figure out if it’s you or if something is changing within the market that you need to adapt to.
Committing to this rule alone will save you a lot of trouble. It’s like a circuit breaker that stops everything until you figure it out. It can only really be two factors that are holding you up. Is it something with the overall market? If so, look at your technicals and setups. Do they need to be updated or shelved in this market condition? The second big factor can be your mind. If you are trading within your system and your ideal setups match up with what you ideally want the markets to do, yet you are still on a losing streak, then it must be something with your attitude, mindset, and/or psyche. Are you keeping a journal? If not, start writing down your thoughts, feelings, and emotions about trading. It helps to pinpoint the problem during personal downturns.
If a mental hangup is causing your trading slump, you might need to do a deep dive within yourself to remove this issue. You might need to call a therapist or a life coach to help identify the problem if it’s deep within your core. You need to remove the source. Address the bigger inner issue, and the negative trade cycles will stop. If you experience a downward slide, stop! Take a break until you figure it out. You might need to paper trade, test again, or decrease your size and risk until you get back into the flow of things.
As traders, we need to keep what we win and not give it back to the market. Curb the bearish downturns in your account. Sometimes it’s an easy fix, but other times you may need to call in the professionals. Just remember, if you want to be in this game for the long term, stopping when things start to go against you should be a top priority.
