This post received overwhelmingly positive feedback from my public Twitter community. It is advice that I gave to a friend of mine a few years ago when he would ask me about multiple different trades per day, every day. Just as in poker, playing “every hand” is a sure way to go broke, so is trading “every hand” in the market.
Years ago, I thought my job as a “trader” was to trade every hand, every day. If something started to move, I felt it was my obligation to go after it. As a result, this caused a significant amount of over-trading, excess losses and cutting some potentially big winners short. FOMO, fear of missing out, causes many to drastically overtrade in pursuit of catching the “next big trade”. Traders often get out of a profitable winning trade simply because they lose patience with it, to move money into a seemingly better trade. Often, the end result is the prior trade continues much higher, the new trade doesn’t work out, and once again, the trader would have been better off to do nothing and just sit in their winner.
I woke up to this reality over a decade ago, after seeing a few big early winners continue higher without me, as I chased one stock after another. This point was crystallized when I read about Jesse Livermore, and his key concepts of the big money being in the big move, and “sitting” in big winners. As I developed as a trader and moved into the systematic trading realm, I devoted a considerable amount of time to system design, diversification and position sizing. Now, when I get into a trade, I size the risk accordingly, set my stops based on pre-defined criteria, and then I do nothing. Everyone wants big winners, but not everyone has the patience to sit in a protracted uptrend.
My position management follows a few key basic premises:
Does my overall risk exposure and allocation allow me to add another position?
Does the technical setup and chart fit into my technical process or not? If it does, then it is open to further analysis, if not, I pass.
By trading with a rules-based process, once the trade is placed, and the stop is in, there is nothing left to do but let the trade go to work. Stops in, emotions out. By approaching trading this way, I avoid cutting positions early simply to move into another position that “looks” better or more promising. Some trades work out, some do not, but jumping from trade to trade with no rules-based approach is often very costly.