We’ve all at some point experienced the spiral of losses. What was supposed to be a great trading day starts with a loser, then another, then another. Next thing you know, you’ve dug yourself a hole far bigger than any average winning day you typically have.
When it comes to my personal accounts (vs the funded trader programs), I came up with my own approach after looking up what some others do. Now, this would work with the funded trader programs as well, but I’ve found I’ve used it more consistently when it was my own money on the line.
Step 1: $250 Draw Down ~ OR ~ $500 Profit Goal
Step 1 is simple, and gives me my goal out of the gate for the day. I have a max draw down of $250. I don’t trail it, I don’t micro manage it, I set it with my brokerage. If I hit it, it’s a hard stop, I’m kicked out of whatever position I’m in, and I’m done for the day. Full stop. Having this makes you trade very, very carefully because the fun ends for the day if you hit the draw down.
Focusing on the positive though, the goal is to get to the $500 profit goal. That is where we get to move to Step 2! It’s like reaching an achievement or finishing a level in a video game. We aren’t done for the day, oh no, we are just getting started.
Step 2: $250 New Draw Down ~ OR ~ Infinite Money Profit Goal
Here is where I set myself a new draw down. Remember, I only got to this level because I was up $500. So I set a new max drawdown of $250 above where I started the day. Let’s be realistic, profits don’t always work out to the penny.
So let’s say I start the day with $10,000. Step 1 my max drawdown was $250, or to $9,750 balance. Luckily though, I make $543 after a few trades, my balance is $10,543. I lock in $250 of profit, so my new draw down is $10,250. That’s the new and final hard stop. I know that regardless of what happens now, I’m up $250 for the day. Even if I trade away for hours on end, I’ve got myself a nice little $250 in profit. Yes, I set this with the brokerage. I know full well in the heat of a bad trade or series of bad trades, it’ll be pretty easy to say screw it and break this rule. So like a child, I have it hard set for me so I have no choice. It’s like guard rails in bowling, but guess what, it’ll save you from ruin.
On the upside, I mentioned the sky is the limit. Truly is. I give myself the license to get a little more creative with the trading, if I want. Somedays I like just keep going with a nice slow and steady approach. Other days, maybe I want to hail mary it. In either case, at worst I’m stopping out at $250 in profit.
No More Rules? No More Steps?
Those are the only 2 steps. Keeping it simple does wonders. If you set up some complex set of rules, in my experience, it’s easier to break them and say screw it. I’ve got 2 steps. At most I’m losing $250 for the day, and if I do that, it’s going to be early on, at least I can go do something else more fun with my time. Once I get to Step 2, the choice is mine. I could just call it quits and lock in the $500+ winner. Or I can see how things go.
In reality, say I had some big home run hit next. I go from $543 in profit in my example to $3,258 (why not). Big run in the bonds and I got lucky and caught it. Am I really going to risk all of that all the way back down to my $250 profit stop? No of course not. In fact after a big home run, I’ll call it quits. Reality is you are unlikely to strike lightening twice, so lock in the big win and do something fun, get a nice ice cream cone or sodie pop down at the local pop shoppe.
If though lets say I keep trading away, things are going good, I get myself another $1,000 in profit after a few hours. I’m not risking all that either. I don’t necessarily update my actual hard stop with the brokerage, but I’ll set a mental stop. It takes great discipline to abide by rules you set with no guard rails, and I consider it a good time to exercise great judgement. I might say something like “the next trade that is a loser, I stop for the day”. If I do end up giving back all that profit, well that’s a problem, and maybe I do need to keep moving my max draw down up after each big win. But I really don’t want to do that.
This is just how I’ve been handling live trading, and it’s worked great. I see so many people just trade away, no goal or rules in mind, just trade and see where it goes. Put in place some type of simple system, you can always update it later. For me though, this has worked out great since I started this approach. Clear, short term, start of the day goals.
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Hypothetical Performance Disclosure:
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.
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