Original Trader’s Corner by Sam Shenker – Part 2

Reality or wishful thinking, it’s a very delicate balance when it comes to trading. As a trader I always learned not to let the wishful thinking cloud my judgment. I never let such notions as hopes and dreams distort the reality of the market. At one point when I found myself grasping at straws in a sinking trade I realized that no matter what I think, wish or hope, the market will do what its need to do, the only thing I can do is accept reality of being wrong, close the trade, take a loss and stay out until I can get myself to think rationally. Most traders instantly feel the urge to get their money back from the market and start trading with a vengeance and by doing so make even more mistakes and sink their account deeper into loss. Never let emotions cloud your judgment, never try to instantly make your money back, you will only lose more. The best thing to do is to walk away and try again after clearing your head no matter how long it takes, that what separates professionals from amateurs.

Reality or wishful thinking, it’s a very delicate balance when it comes to trading. As a trader I always learned not to let the wishful thinking cloud my judgment. I never let such notions as hopes and dreams distort the reality of the market. At one point when I found myself grasping at straws in a sinking trade I realized that no matter what I think, wish or hope, the market will do what its need to do, the only thing I can do is accept reality of being wrong, close the trade, take a loss and stay out until I can get myself to think rationally. Most traders instantly feel the urge to get their money back from the market and start trading with a vengeance and by doing so make even more mistakes and sink their account deeper into loss. Never let emotions cloud your judgment, never try to instantly make your money back, you will only lose more. The best thing to do is to walk away and try again after clearing your head no matter how long it takes, that what separates professionals from amateurs.

As a trader, I learned not to force trades. I learned the hard way not to push the trades just because I’m bored and there is nothing to do. Market does not always have a trade available, so the best thing to do in situation like this is not to do anything and be patient. Sometimes the best action is the one not taken. But what happens when you go ahead and push anyway, answer is simple, you lose and if you push again you will lose again. The key to becoming a successful trader, knowing when to stop yourself. A trader must, MUST, know how and when to stop trading and stay out of the market. It’s hard to stop, but it’s important to stop and walk away for sometime when the trades are not going your way, because losing on a couple of trades can turn into a losing streak.  If the trader can’t stop trading, he or she will stop eventually when the account runs out of the money. 

One of the most common mistakes traders seem to make is position size. Most traders instantly size up their positions after only few successful trades that they were lucky to be involved in, and that is a bad mistake. Size is a double-edged sword, which can cut the trader with either edge, because size will not only magnify profits, but will also magnify loses. Another common mistake is increasing the size of the next position after a losing trade in an attempt to recover the losses. That is when the trader is most vulnerable, because he or she is not only emotional because of the loss, but also an increased size can push the account deeper into loss. As a trader I learned the hard way to bring my size down when my trades are not going my way, not the other way around, because when my trading is suffering, my account should not. Loss of capital will hinder the trader’s ability to recover the losses and eventually will force the trader out of the market. Size does matter when it comes to trading; initial position size must always reflect the size of the account.

As a trader I learned that it is always important to understand the failure of success and I mean exactly the failure of success. As trader becomes more and more successful in his or her trading, there is a moment when the trader believes that he or she is a great trader and nothing will ever again go wrong, WRONG, that is when the trader is most vulnerable to him or herself, because that is when the trader has the biggest position size he or she ever traded. But that’s is where disaster might strike because the trader’s success can cloud the judgment by what I call a self-proclaimed invulnerability, a thought that the trader knows everything that he or she needs to know about trading the market. A thought such as this is ultimately will lead to the trader’s demise, because if something stops working or the market conditions change and trader still believes in his own hype, he or she will become a victim of own success. Never think that if you are that good, you can always be better, there is always room for improvement. Markets change and in order to remain successful, the trader must change as well, remain humble, never become a victim of a self-proclaimed invulnerability and remember to learn from the market and be thankful for the lessons.

As a trader, one of the lessons I learned the hard way is to not overtrade. Overtrading will lead to a substantial loss, because every time the trader enters the market, he or she exposes the capital to the market, because an increased number of trades will not instantly translate into profits and may increase the amount of losses the trader will sustain. Also with an increased amount of trading activity, increases the amount of execution cost, which includes spread, commissions and slippage. The most common misconception amongst the novice traders is that the trader has to be constantly in the market, but by being in the market all the time the trader does not give him or herself a chance to pause and will eventually lose because of the unfavorable market conditions. There are times when I trade, and there are times when I stay out, because if I don’t see any trades I will not trade. Trading out of boredom is the worst reason to be in the market. Patience, patience, patience. Patience is one of the keys to becoming successful trader, patience will keep the trader from overtrading and by being patient a trader has enough time to observe and look for a potential setup for the next trade. Remember it’s not the quantity of trades, but the quality of a trade.

A lesson that I learned as a trader is never to chase trades, because by chasing the trade and entering at another level alters the original risk/reward and violates the trade setup. Traders who chase the trade will most of the time find the price going against them, which instantly increases the probability of being stopped out or even taking a larger than anticipated loss, and its all due to the eagerness of the trader to establish a position. Never chase trades, because by the time you catch it, the trade is not the same that your original setup called for, and that makes the risk/reward unfavorable. Other mistake traders make is becoming “hang-up” on a missed trade. Key to success in trading is not to pay attention to the trades that the trader has missed, but rather keep the attention focused for the potential trades that will occur in the future. A missed trade serves as a confirmation that the trader is correct in his or her analysis and missed setup should be used to look for potential trade in the future. Remember: “Loss of Opportunity is Better than the Loss Of Capital”. 

As a trader I learned how to learn from my own mistakes and from the mistakes made by other traders. The most common mistake is not to admit that you are wrong, accept the consequence of the wrong decision and close the trade. Instead what most traders do, they let their pride takes over and they hang on to a losing position because they are afraid to admit that they were wrong. Pride has no place in the market, pride can lead to devastating losses, especially when the trader had a successful run and feels invincible. I’m only proud of one thing, that I have no problem admitting when I’m wrong and move on to another trade, which is why I use stop loss to minimize the damage of my mistakes. Mistakes should be used as a learning experience, I may not know all of the things that work, but I do know what does not work and will not repeat the same mistake twice, or at least not the third time.

As a trader I have learned that size of the position does matter, because size is a double-edged sword, it magnifies both profits and losses. The most common mistake made by the novice traders is to instantly increase the size of their positions in an attempt to magnify their profits, but instead they mishandle the size and increase the loses, and by doing so the trader gets aggravated and yet once again increases the position size of the next trade in an attempt to bring back the account balance, thus exposing the account to a bigger potential loss. Another downfall of an increased position size is that any normal price fluctuations will be magnified proportionally by the size of the position, and if the trader has leveraged his of her account in an attempt to maximize the profits, he or she will face a possibility of a margin call, loss of capital and loss of a position. The worst outcome of overleveraging and sizing up is a margin call, a loss of capital and subsequent move in the right direction, thus leaving the trader to blame him or herself for the mistake. The key to trading is to know that profits do not happen instantly and by increasing size of the position, the trader will not only maximize profits, but will also maximize losses. In order to stay in the market and withstand the short-term volatility, a trader must learn how to adjust the position size according to the account. In order to maximize the profits and minimize the losses, this trader uses a “perfect” leverage technique, where the size of each individual position will not affect the overall account, even in times of extreme volatility. 

As a trader I learned that one of the cornerstones in trading, and I mean successful trading is money management, and what fascinates me about most traders is how they trade without protective stops. A stop is not an option when it comes to trading, its mandatory for preserving the capital and must be used to take out the guessing of should I close the losing trade or maybe it will turnaround, This type of thinking can sink trader’s account deeper into loss, because no stop and no decision combined with hesitation and wishful thinking is a recipe for disaster. Stop is a hard loss, a trader MUST NEVER TRADE WITHOUT THE STOP LOSS. Trading without a stop exposes trader’s capital to an unlimited loss; trader must never enter a trade with potentially unlimited loss. Key to trading is to keep the losses to the minimum, while maximizing profits. Losses are inevitable; it’s how soon the trader is willing to deal with them, because a small loss without the stop can easily snowball into an avalanche and wipeout the trader’s account. Do not be proud, use stops; no one is right 100 percent of the time, NO ONE, including myself. Every time I enter the trade, I already have a predetermined stop; because the only known in a trade is how much I’m willing to lose, and I never lose more than I risk. A trader must never lose more that he or she risks on a trade while keeping the risk/reward positive.

As a trader, the most valuable lesson I have learned is to adapt to changing market conditions, because what worked yesterday will not necessarily work today or tomorrow. Most common mistake made by traders is to stick to the strategy that stopped working, it does not matter is the strategy produced favorable returns in the past, now is the present and tomorrow is the future. As traders we do not trade the past, we trade the future. As time progresses market participants change, rules change, price action changes, so why does the trader persists on doing something that does not work anymore, answer is simple human pride, do not be proud, admit that you are wrong and change what does not work. My advice has always been to traders, “If it works use it, if it does not change it”. I utilize an adaptable and self-learning fully discretionary trading system, which I constantly adjust to changing market conditions, because if the trader does not change with the market, he or she will be left behind. My advice for my readers is to follow the 3C’s and 3L’s of trading and you will be successful. “3C’s: Confidence, Consistency and Compounding and 3L’s: Levels, Leverage and Liquidity”.

As with any markets there are times for action and there are times for inaction. This trader believes that in order to be successful, trader must remain vigilant and not tire him or herself out by chasing everything single price tick. Price chasing must be replaced with caution, patience and vigilance. As a trader I learned that it’s impossible to trade every day, I do not trade every day, I trade when there are trades and I stay out of the market when I do not see any. Trader must not be in the market when there is nothing going on, do not trade if you do not see any trade setups or the market conditions do not conform with your trading methodology. Trade only when you see something; do not trade when you don’t see anything. NEVER TRADE JUST TO BE IN THE MARKET

As a trader I’m constantly reminded by the market to remain humble and respectful, because when I forget and fall into a trap of thinking that I’m better and more skillful than I’m actually am the market will remind me and give me a warning. Most common mistake made by traders after they make just a few successful trades is to fall into a mental trap and think that they are good, really good and that they can do anything and the market is their playground. WRONG. The market has a tendency to warn and remind you of whom you are, the key to becoming successful trader is to listen to the market and heed to the warning. It’s important for the trader to remain humble and learn the limits and capabilities that he of she posses. Because going beyond individual limits and capabilities will only lead to a loss, or even worse a series of losses, which can have a devastating impact on a trader both emotionally and psychologically. NEVER THINK THAT YOU ARE BETTER THAN YOU ACTUALLY ARE, NOBODY IS THAT GOOD, NO ONE, NOT ME, NOT YOU, NO ONE. Always be humble and you will become successful.