Opinions expressed by Entrepreneur contributors are their own.
In many areas of life, success is difficult to measure or even define. Day trading is not one of them. Every day you trade, you know that it was either “green” and you made money, or it was red. However, it is a superficial way of looking at things. There is a better way to measure success as a day trader: Will you make money in the long term?
That’s because the short term doesn’t really count. On any day, a beginner can get lucky and make a bunch of money in just a few minutes. You can also go to a casino, pull the handle of a slot machine and hit the jackpot. This is cool and fun. It’s a shame they can’t be repeated.
Although there are many variables in day trading that cannot be predicted, I can guarantee you one thing with absolute certainty: if you have been in this profession for more than a week, you will have red days.
I can also tell you something that comes from my experience placing over 20,000 trades: the most important skill you need to develop to be successful in the long term is learning how to make money the right way lose. In other words, how to have successful red days.
Related: You Won’t Achieve Work-Life Balance Without These 10 Things
It sounds like a contradiction, right? How can you “successfully” lose money? Let’s answer this question by looking at the three components of each trading day:
- How you did it.
- How did you feel.
- How you behaved.
For the “How did you do it?” component, we assume you lost money. Maybe the day started well, but you ended up in the red when you netted your trades.
The second component – how you felt – is the cauldron of emotions that you will definitely feel when taking action. I’m here to tell you that these emotions never completely go away. It’s not like learning to ride a bike, where you can overcome the challenge pretty quickly and things are automatic. No matter how experienced you are in trading, a voice in your head will give you urgent suggestions when you have lost money. There will be things like:
- We had a winning streak of 10 green days – the longest ever! Let’s not ruin it. Trade a little longer.
- We may have reached our maximum loss, but it’s still early! We can make it up to you. You know we’ve done this before.
- Sure, we’re in the red, but now is a good time to “shop cheap” and reduce our prices Average cost. That’s just smart investing.
The voice in your head is so convincing! It sounds just like you and it sounds so sensible. One small problem: this advice contradicts your trading plan.
“What trading plan?” you ask. Here we introduce you to the safety gear you should put on before attempting to climb this rock face, also known as day trading. Before you make your first trade, you need to know your maximum acceptable loss for the day. In addition, there is knowledge of other important parameters such as your maximum loss per trade and the maximum number of stocks to trade.
The entire purpose of the trading plan is to give you rational guidance when your emotions reach the fever zone in the heat of trading.
This is where the third component comes into play: “How you behaved.” You feel the urge to double down on the last bad trade, but you resist the urge and act right by not taking another trade.
This brings us back to our definition: a successful red day is one where the market moved against you but you stayed within your pre-agreed trading parameters. You tried your best, but it went wrong. You have not exceeded your maximum daily loss limit; Instead, you quickly faced the reality that it was going to be red today and turned it off.
Related: How I turned $583 into $10 million through day trading
If you have this discipline, you will quickly notice that it is easy to recover from little red days. Yesterday you lost a little and promptly ended the matter. You don’t have much of a challenge today because you didn’t dig yourself into a deep hole back then.
If you’ve been following me for a while, you know that I’m a big proponent of keeping a trading journal. It is crucial that you review your trades when they are not occurring in the heat of the moment and you can sit back and rationally analyze the trading day.
Over time, I have come to realize two profound truths:
On days when the market is strong and I’m making money, I’ve made a disproportionate amount of my annual profit by letting my winners run. I resisted the emotional urge to “quit while I’m ahead.”
Conversely, the longer I am in this job, the quicker I am able to cut my losses and admit that today is classified as red. I couldn’t make it green, so I decided on the next best solution – making the red tag as small as possible.
Related: Do You Know How to Lose? 4 principles to reduce your losses
Small hinges swing large doors. The difference between making five cents a day per share and losing five cents seems so small, but it is actually the long-term difference between success and failure in this business.
Cut your losses and let your winners run. Even though your feelings scream the opposite.
You can’t control the markets. And if you’re a human and not an AI bot, you can’t stop strong emotions from arising. What you can do better is control your actions. If you do this on your “red days” – even most of the time – you have taken a big step towards long-term success in this profession.