What constitutes a good trader from a bad trader? Let’s start with the trade itself. How many of you agree with this statement? Good trades make money; bad trades lose money. Most of you are probably shaking your head in agreement thinking of course! Isn’t the whole purpose of trading to make money? Well…. not exactly.
My best trades have been the ones that have brutally opened up against me. Good trading is all about how you manage out of your unsuccessful trades. I know traders who have made many profitable trades in a row, but then they get into one trade that goes against them and they are unable to handle the loss. Instead of exiting out of it properly by taking a loss, they hold onto it tightly making it grow by feeding it.
They throw good money at these bad trades only to see them go against them further. That’s when they become religious. They hope, pray and they promise to the stock market gods that if their trade would only come back to their entry level they would happily exit out of the trade and never do it again.
Does this sound familiar? It’s the 2,000-pound elephant in the room. If these traders prepared for losses, they would have just exited out of these trades that opened up against them. If they accepted the losses and traded properly, the money would eventually come. Instead they became fixated on the 2,000-pound elephant. The market is not about elephants. It’s about bulls and bears.
I was very fortunate to learn this secret my very first day on the job as a trader’s assistant. I’ll never forget my first day; it was the Summer of 1994. I knew absolutely nothing about the market, but I sat in the million-dollar room at Schonfeld Securities, the biggest prop firm in New York. People would pay money to sit where I sat, but there I was being paid to learn from the best traders in the firm.
My boss was one of the top producers and by 9:50 am he was up over $20,000 dollars. Needless to say, I was very impressed, calculating in my head that he was making $1,000 a minute. I was in love instantly with my new job. I was so excited to learn how to trade until my boss started to pound his fist on the desk and yell out some four letter words that I can’t type here but what really got my attention was when he got up and pushed his chair across the room. I was told this was normal trading behavior.
I was shocked and couldn’t understand why he was so upset. He just made $20,000! I would have been dancing around the room slapping high fives to everybody. After he calmed down, he told me that the reason he was so upset was because he had lost his discipline. He said “I should have gotten out of the trade sooner but I didn’t”.
I interrupted him by saying “it’s okay, you made a lot of money on it”, but he told me it wasn’t about the money. He lost his discipline. He said “The next time I lose my discipline it will crush me like a 2,000-pound elephant. He said “Follow the rules, and the money will come. Don’t ever think about the money”. At that moment I asked my boss what the rules were and then I made sure he followed them every single day. I didn’t want any more chairs being thrown around the room. This is how I learned how to trade.
The worse thing that happens to new traders is they make money doing the wrong things. This is how bad habits are formed. Try telling a trader that just bottom fished a stock and got lucky making a lot of money that he or she should not have done that because it’s a high risk trade. The first time they get lucky, but the next 99 times they don’t and now they’ve developed a bad habit.
This is why I created Boot Camp. It’s the most intense workshop that I teach. To quote one of my students he said “You’ll come out of this class like Rambo ready to take a knife to the market’s throat”. It’s a two week, 5-hour a day, live trading class that teaches both day trading and swing trading. I’m not writing this article to sell you this class, I’m writing it to tell you why I teach it. It’s all about the challenge. My students must follow all of my trading rules, and trust me, I have many.
I have strict rules in this class because there is only one thing that I hate. I hate when I see one of my students losing money because they entered into a bad trade because they weren’t following the rules.
At the end of the first week, we have a day trading competition. The competition has only one winner, the person who makes the most money. The word “competition” combined with the word “money’ is a recipe for disaster.
I just knew my BA in psychology would come in handy. I decided to do a psychological test on my students, after all this would be the best way to really show them that following the rules is the most important aspect to trading. My number #1 rule is no trading the first 15 minutes the market is opened. This is the shake out period. Just as I suspected 3 of my students broke this rule right off the bat during the competition.
They traded the first 10 minutes, got shaken out and lost money. I wasn’t surprised that the other 12 students in the class also broke the rules. They traded against the trend, they entered in between levels, and they traded high risk stocks with big spreads. They broke every single rule I have. All the traders in an attempt to make the most money, lost money in this competition.
I couldn’t hold it in for too long. I told them I did a test on them and that we were going to do this one more time except we’re not calling it a competition. We’re going to call it a challenge. A challenge to follow the rules. The winner of this challenge is whoever follows the rules. It doesn’t matter how much money you make or lose, you win this challenge if you follow the rules.
Everybody can be a winner! So what do you think happened? They all followed the rules, and most of them made a lot of money. Only two of the students had small losses. This was the best lesson that they were taught. They had to actually experience this first hand and see that it really worked without having a 2,000-pound elephant in the room.
For more information, visit us at www.thestockwhisperer.com
Until next time,
Stefanie Kammerman, has trained thousands of students worldwide how to Day Trade and Swing Trade over the past 22 years. She is the Founder and Managing Director of The Stock Whisperer Trading Company, www.thestockwhisperer.com where she runs an online educational trading room called “The Java Pit”. Her unique approach of old fashioned trading in a high tech world teaches her students how to trade by reading the tape and following the Dark Pool, which is how she spotted the last 9 corrections weeks before they happened.