When I first began to day trade my own capital I was working in the financial industry managing a portfolio and under no delusions that the journey of trading for myself would be easy or a “get rich quick” scheme.
I understood that it was going to be hard work and take discipline and perseverance. What I did not understand was the psychological impact trading with your own capital has on you as a trader.
TRADE IN THE SHORT-TERM BUT THINK LONG TERM
When managing money that is not yours there is a detachment from the everyday market movements and you are concentrating on months, quarters and years for performance. The shift to trading my own capital now meant that I was managing returns on a daily and intraday basis, it’s like seeing the forest and seeing individual trees.
AVOIDING OVERTRADING
This was the biggest adjustment I had to make as a trader and it did not come easily. I felt the need to be “in the market” at all times, and tried to trade every minor fluctuation on short time frame charts, attempting to make as many trades and as much profit as I thought I could. I would have a losing trade then feel the immediate need to make back the loss and more, this generally meant that the next trade I would take would be opposite to the first trade I took.
If the long didn’t work, then the markets must be going short and I would short. You can see where this is going, late to the party and initiating trades at the exact wrong time. Buying highs and selling lows, something that I had never encountered when managing funds for others. I asked myself what was I doing wrong?
TRADE WITH THE MARKET
When looking at my longer term trades that would last a few weeks to a few months I would always have a level at which it looked attractive to purchase or sell short the stock. This might take a few days or weeks to achieve or it might never occur and I would move on to the next trade. I needed to apply this to my day trading, there was a clearly defined plan of attack, but how, the markets move fast and you don’t want to be late to the party and miss the move.
KEY TURNING POINT
My “aha” moment came when I began to look for different ways to determine the overall trend of the markets. Some methods were clumsy and others were constructed around indicators that cost thousands of dollars. There had to be a better way!
What I discovered was to pay more attention to the larger timeframe trends in the market, like I had done before. I didn’t think that intra-day traders needed to concern themselves with the longer-term trend. Why was the market looking so weak for the first hour of trading then suddenly reverse and grind higher for the rest of the day? The daily and 60-minute charts provided some insight, if the longer term trends were bullish, then going short when the markets opened and trading the short-term trend was actually “counter-trend” trading and I always had success “trend” trading the portfolio.
THE TURN AROUND
If there was a strong daily trend up I would only be looking for “long” trades that day, I would be looking for zones of entry where I felt the market would firm up and re-trace, I learned the hard way that there are many intra-day “fake-out” moves.
By trading only in the direction of the overall trend I was on side with the markets, if my first trade did not work out I now had a conviction about the markets and would try again in the same direction on the second trade. This changed three things for me in my trading, first I was taking fewer trades, second more of my trades were successful and third I had more confidence in my trading decisions.
I was no longer a slave to the stop and reverse nature of the S&P 500. I was beginning to trade with the traders that could move the markets, not the traders who the largest players unloaded their contracts to when they were done holding them. I was selling in to strength not chasing market strength, and getting out of short positions on fast flushes down, not waiting until the flush to initiate a trade.
By taking less trades and concentrating on one market direction and waiting for a pullback, I was now trading in a manner that provided me with confidence to trust my trades and trade my plan, this helped my psychology, because it took a lot of the big swings out of my equity curve and let me focus on longer term profitability not solely on the profitability of one trade in isolation.
STICK TO YOUR PLAN
My recommendation is this, have a plan and stick to it, even if you are intra-day trading there is still a larger overall trend that will move the market, be aware of it and take less trades that are more profitable, avoid the stop and reverse style of trading. This will empower your trading and allow you to focus on the bigger picture and allow you to look at your equity curve over a longer-time frame and not chase trades to make back for losing trades.
[Editor’s note: Did you ever have an “aha” moment? If so, what was it for you? Please share a comment below.]
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