The trades you don’t take are just as important as the trades you do take.
Everyone’s been here: You are up nicely on the trading day. You’re hot and in the grove. All of a sudden, you take a losing trade after a series of winners.
All good, I’ll take the next setup I see to make it back. Another loss.
Next thing you know, all of your gains are wiped out and you are back to where you started.
One of the most important skills of a successful trader: Knowing when to stop trading.
These strategies will help you know when to call it quits, and protect you from overtrading:
Set A Daily Max Loss
Daily max losses are ESSENTIAL for day traders. Without them, it is possible to lose a huge portion of your account in a day when you go off the rails. Once you lose a certain amount of money per day, ideally no more than 3% of your total account, you should get your account locked by your broker. Here’s why a daily max loss is essential:
This daily max loss will prevent you from revenge trading and digging yourself into a huge hole. When you are using a daily max loss, it is important to appropriate risk per-trade appropriately. You don’t want to blow your whole max loss on one trade. You want to give yourself an opportunity to exercise your edge, but keep it tight enough to cut yourself off when you’re cold.
Let’s say you’re daily max loss is $600. Instead of risking $600 on your first trade of the day, only risk $150. This gives you four chances instead of one to put on a winning trade. If you lose on 4 trades in a row, it’s usually a sign anyways you’re not seeing the market clearly and should call it quits.
Recognize When You’re Off
Some days it’s not happening. Life gets in the way, you get distracted. Know when you’re heads not in the game, and call it quits. Self-awareness is a trait you have to develop early on in your trading career.
Always remember this: The market isn’t going anywhere. There is nothing wrong with stepping away for the markets for a day.
Recognize When You’re Gambling
It is easy to digress to gambling when things start to go south during your trading day. Pay attention to these signs:
When they come, it’s time to call it quits. Tomorrow is almost always a better day to make back a loss than today. Every trading day is a new day.
Write Out Your Trading Plan
One of the best ways to stop yourself from taking bad trades is by writing down your trading plan. The extra minute will allow you to REALLY evaluate whether this setup is worth taking. This is especially important on days when you’re cold. Bad setups look the most appealing after a loss. Here is what you should write down before every trade:
Writing down your trading plan will allow you to really think and understand if this trade is worth your physical and mental capital.
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