Transcription
Welcome to today's deep dive into the psychology behind why we, as active traders, tend to fall into the habit of holding our losers way too long while simultaneously selling our winners too soon. The result is an inverted profit-to-loss ratio where your average winners are smaller than your average losers. The outcome is that you need to be right 75% of the time just to break even, and that's a steep ask for any beginner trader.
In fact, as a seasoned trader like myself, right now I'm sitting up nearly $1.5 million on the year—not a bad year. I’ll say my results aren't typical. But you want to know what my accuracy is this year? This year it's a little lower—it's only about 65%. Yet, I've got $1.5 million of profit, and the reason is because my average winners are larger than my average losers. I have a positive profit-to-loss ratio.
So in today's episode, I'm going to teach you some tips and tricks you can implement in your own trading starting today to get better at cutting your losers faster. Because if you can reduce your average losers, even without increasing your accuracy, you will make more money. If you can reduce your average losers and increase your accuracy, that's when magic happens. So let's go ahead and dive into today's episode.
Okay, so you're probably asking, "Why do I sell my winners too soon and do I hold my losers too long?" This is what I'll say about that: it is a very common habit. In fact, for me, when I was getting started, my profit-to-loss ratio looked like this: my average winners were about 10 cents per share, and my average losers were about 20 cents per share.
What I knew without a doubt was that I was holding my losers more or less twice as long as I was holding my winners. In total, my average losses were twice the average winner. In fact, the whole time was also inverted, where my average winners were like 3 to 5 minutes long, and my average losers were like 10 minutes. So I was sticking with the losers but not sticking with the winners. It feels really counterintuitive that a trader would just bail out on their winning trades, and then when they're in a loser, they'll just hold and hold and hold.
But this all ties back to trading psychology and the emotional battle that we face every single day when we come into the market. It stems from a fear of loss. Here’s the issue: many traders, including myself when I was getting started, come in with this inherent fear of losing money. We know that the market is risky; we don't want to lose money. So, as soon as we come in for our first trades, we're in this mindset of fear and scarcity, afraid of losing what we've got.
What we end up doing is when we take a trade, if it's a winner, we're so afraid of losing that winner. It's still a fear of loss; we're afraid of that winner going away and turning into a loss. So, as soon as we're up even just a teeny bit, we bail out immediately to take the profit—we don't want to risk losing it. But when we're in a losing trade, what do we do? We hold and we hope that it’ll turn around because we don't want to take a loss. And you don't really take a loss until you press that sell button.
Similarly, you don't actually have a winner until you press that sell button. So when we have winners, we're really inclined to sell super fast and just lock it up and protect it. But when we have losers, we're inclined to hold and hope that the price turns around, and maybe we make things worse by averaging down on the position.
You can see this is a trade that I just took, which is sort of a good case study of this. Now, a lot of people say, "Ross, I notice you're really aggressive and quick about cutting your losses," and that is true. That’s something I got really good at early on in my career because when I started, I couldn't afford to take a lot of losses.
I've known traders who come into the market with larger accounts. Maybe they've got a six-figure account. Oftentimes, what I see these traders do is they'll take a position—maybe something like this JTI—which, if we look at the chart, they'll buy something like this.
Let's look at a good example of maybe what a possible entry could have been. So let’s say on this one-minute chart, we’ll just auto scale. On this one-minute chart, let’s say we get this nice rally up right here, and then they bought right here, first candle to make a new high. Now, I took that trade also; I got in for the first candle to make a new high. What was my target? A squeeze through the high of day. If I’m going to be real, I was looking for a move up towards 11.50 or 12; that would have been nice because we had the first leg up, and I often like to see the second leg up match in size.
So if that’s the size of the first leg, then the second leg should get us up to this area. That’s what we would really like to see. So I got in for that first candle to make a new high, which is a classic micro pullback setup that I trade all the time and, of course, I teach you guys in the classes. But it sort of stalled out at 10.
Now, what did I do? I got out. But what maybe a beginner trader would do is say, "Oh shoot it didn't go to 10. I just had a profit, now it’s coming back down. I’m just going to hold this; it’s probably going to come back up." Next thing you know, now it's down at 9, now it's at 8.50, now it's at 8, and they're in the red. It comes back up; maybe they add to the position down here, so they're bringing their cost basis down, but they're still in the red. They’re in the red this whole time.
Finally, it bounces back up a little bit, but it’s not enough to recover the loss. They're still holding, still holding, and maybe they're still holding even right now, and the loss is getting bigger. Now maybe they're thinking, "Well, what was the news on this stock? You know they’ve got news on it—alright, they ordered a fleet of new planes. Alright, maybe I'll just hold this a couple days. You know, maybe this will probably turn around."
Next thing you know, three weeks later, they’re still holding it. Look, it's possible we see some stocks that continue higher. AGFY is a nice example of that. This stock has gone from 4 up to 30, and it is still holding. So the news was strong. But it's also not uncommon that you'll see these stocks come all the way back down and give back those gains. And that's the fact is because that’s a high risk. You can’t just keep holding it.
What I’ve often seen happen is traders who fall into this habit will end up sitting with a position window that has like five or ten open positions that they've been holding for weeks or months that are just so far against them. They don't even know what to do. Now, that is the ultimate example of holding your losers way too long. I mean, it's one thing to do it on an intraday basis; it's another thing to turn a day trade into a swing trade. At that point, you’ve broken all of the rules of day trading. You have now changed the rules to accommodate how to hold a losing position, and changing the goalpost in the middle of the game is not the right strategy.
So let’s come back here; this is where I was. This is not where I am anymore. What did I do to change? These are tips and tricks you can implement in your own trading today.
The way I reduced my average losers and increased my average winners required a couple of things. First of all, I looked at my average losers in more detail. I decided to put a little magnifying glass on it, zoom in, and try to figure out what exactly on these average losers I was doing wrong. Why was it that I was getting caught with average losers that are, you know, 2x my average winners?
I realized, number one, that on the days when I was catching a lot of these big losses, I was almost what you would call in a state of emotional hijack. I had taken a loss earlier in the day, and that got me frustrated, angry, and stubborn. So when I got into a second loss, I just dug my heels in and said, "I’m not taking a second loss."
Look, the market doesn’t care how you feel about your position. Stocks are going to go up; stocks are going to go down. Your job is to trade in the volatility and to cut your losses very quickly. One of the things I recognized was that on my days where I was taking really big losses—those are the days. You could even look at that on my calendar right now—on days where I have these outside losses, you know, $111,000 in the red, $99,000 in the red—those are days where pretty much everything is going against me, right?
I mean, it’s like the whole day is a struggle. There’s nothing about the day that’s good for the most part, and I probably on these days should have just stopped sooner.
So on a day like this, you could see this is classic where the losses get bigger and bigger. What I learned was that, number one, I need to stop sooner on days when I'm red. By stopping sooner, I’m going to expose myself to fewer of the trades that are causing these big losses. But in order to stop sooner, how do I do that? I need some rules.
Now, the rules that I like to implement, number one, is of course a daily max loss, and this is especially important as a beginner trader. I would say these rules are guardrails. They're like training wheels that are important when you're getting started. But as you gain more experience, you may have a different relationship with some of these rules, and that's to be expected.
So, number one, having a daily max loss and following it—whatever that dollar amount is, you've got to have the max loss, you’ve got to follow it. Number two: going from green to red. If I go green to red, that’s a major problem.
Number three: if I give back half of my day after hitting goal. So I learned these three triggers can cause me to get really emotional. If I cross any of these three triggers, I have a high likelihood of going into a state of emotional hijack where I can start to spiral.
Now that I’ve sort of understood that these are my triggers, as soon as I experience a trigger, I have the sense of awareness—okay, I’ve just hit a trigger; I need to be really careful. I need to slow down; I don't want to get smoked here, and I need to walk away.
I’ll say that it's easier said than done because sometimes when you hit a trigger, that trigger you’ve already kind of... it's like you've already crossed the point of no return. Sometimes, especially if the loss is really big, like you take a max loss and it's a huge loss, then the second you have that loss, you've crossed the point of no return. Now you’re just deep in the red; it’s really hard to walk away.
But the better you get at recognizing these are my rules and as long as I follow them, I’m protecting myself from the days where I'm going to have really big losses. It’s going to help.
So then what’s the net result if you implement these guardrails and you follow them consistently? The result is that your average losers should get smaller.
Now, maybe they don’t go all the way to 1:1; maybe they go to 1.5:1 in cents, but this is a step in the right direction. Your average losers are getting a little bit smaller because what you’re doing is you’re eliminating some of your outside losses that are hurting your average so much. I mean, the days where I'm down $10,000 and I'm taking these really big losses hurt my metrics. I want to avoid these types of days as much as possible. That’s super important.
Okay, so step number one is implementing some rules around when to walk each day. Knowing when to walk away is a really critical skill that beginner traders need to learn.
The second component that really helped me was focusing on A+ quality stocks. Here’s the thing that’s really interesting: on days when I’m struggling, I find myself very inclined to convince myself to trade a low-quality setup. I start to feel a sense of desperation. If I’m maybe in the red a little bit, I want to recover that loss, you know; I don't want to sit in the red, and so I lower my quality standard.
What I’ve learned over the years is that if I trade A+ quality setups, my accuracy on those setups is typically going to be between 75% and 85%. This is my accuracy, and my profit-to-loss ratio is typically going to be 2:1, where my average winners are twice my average losers.
But when I go down to B-quality setups, this all of a sudden drops to like 65% to 70%. It should probably go to 75%, but you sort of get the idea. Profit-to-loss ratio goes down to 1:1. And when I trade C-quality setups, this can be less than 60% accuracy and a negative profit-to-loss ratio. But here’s the interesting thing: on any given day, I might only see on a typical day, you know, three to five really good A-quality setups.
In a hot market, maybe it's 10 to 15 or 20 B-quality setups. In a regular day, maybe 5 to 15, and maybe 25 to 40 C-quality setups—you could find, you know, 100 of these.
In a hot market, you could find hundreds. So if you're desperate to recover losses and you're not seeing A-quality setups, what a lot of people will do is they'll just start trading B-quality setups and then they'll just start trading C-quality setups.
So the result is that as they start trading lower quality setups, they’re hoping to make money and recoup losses, but their accuracy is going down, their profit loss is going down, and they start catching more losers. Of course, you’ve got more losers for every trade, and the losers are bigger than the winners. So you get to this point where in terms of profitability, you get more profit by increasing the number of trades, but when you reduce your quality standard, your total profit is going to go down.
This is the amount of profit that you can make; this is the number of trades. You just know that these are A-quality, this is B. So maybe you make a little bit more by introducing some B-quality setups. Then this is C and you know D and so on and so forth.
I'll say that I don’t actually grade every single trade I take and say, "This was an A-grade; this was a B-minus; this was a C-grade." Generally, I would say for my trading, a stock that meets all five criteria of stock selection is going to be an A-quality stock.
The five criteria of stock selection include: we've got to have the right price, it’s got to be up the right amount on the day, it's got to have the right relative volume, it's got to have news, and it’s got to have the right float. There are some bonus criteria that can amplify all of these, but these are the five most important criteria that we need for stock selection.
If we have all five of those criteria, then that stock generally is going to be an A-quality stock. What’s interesting is, in my opinion, more important than the pattern is the quality of the stock. Some people get really focused on trading a very specific pattern, which I can appreciate, and I like candlestick chart patterns.
But the perfect pattern, so to speak, on the wrong stock won’t work as well as a less-than-perfect pattern on the right stock because it’s the stock itself that’s really creating the opportunity. The pattern, yes, people are recognizing it, but if you have an A-quality pattern on a stock nobody sees, it's like a tree falling in the woods—does anyone hear it?
I mean, maybe that's not the best example, but you get the idea. If you have a really good pattern but nobody sees it, no one's going to buy it. The breakout won't happen, and in fact, nothing will happen. So the tree is silent, essentially as it falls, because nothing happens.
Whereas on an A-quality setup on an A-quality stock, even a subpar setup, so many people are watching it because the stock is so strong that you’ll get better resolution even if it’s not a perfect setup.
So number one, the rules of knowing when to walk away. Number two, focusing on A-quality setups. Number three, trading less. You do not need to trade a hundred times a day. Trading less can equal more.
By taking those three steps and implementing them into my trading, all of a sudden I saw my profit-to-loss ratio change substantially. I saw my average losers dip down to, I think, maybe at the lowest 12 cents per share. What I actually saw was my average winners, which had been previously 10 cents a share, starting to move up to about 15 cents a share.
At 15 cents per share average winners with 12-cent average losers, well, if I’m right 50% of the time, I’m a profitable trader because my winners are slightly bigger than my losers. If I can maintain an accuracy of 65% to 75%—kind of in that range, which is going to fluctuate based on the strength of the overall market—because even A-quality setups in a cold market won’t be as clean as in a hot market.
So my accuracy, you know, 65% to 75%; I think probably more like 68%. But anyways, depending on the market, this allows me to do really well, and so I’m at a point right now where I’m trading with an average position size of 10,000 shares. That's my average, and my average winner is $1,500—right? So 15 cents per share. This is completely sustainable with this profit-to-loss ratio, as long as I can keep my average losers tight.
Now, let’s talk about another trick for helping boost the average winners. While certainly it's helpful to implement these three rules to help you reduce your average losers, and some of these will invariably increase your average winners because you're focusing on the right type of stock and you’re trading less, which means, you know, trade the best, leave the rest.
But a couple of other things you can do: how do you deal with that impulse to bail on the whole position? Because I used to do the same thing. I’d be in a trade, I’d be up a little bit, and I would sell the whole thing.
So this is what I did. Right on my keyboard—I’ll put my keyboard up here. This is my keyboard that I’m using and it is a wired keyboard. This actually connects to a desktop computer, and it has a trackpad, which I really like. What I did was my button to sell is Control-Z. Control-Z is the undo button; you know when you're doing pretty much anything on the computer. Although you cannot do an undo with trading—I wish you could—it was an intuitive button for me to put as my bailout button.
So Control-Z is my bailout. When I first set up that hotkey, the way I scripted it was Control-Z, sell full position, bid minus 10 cents. So it's a limit order—oops, sorry. So it's a limit order 10 cents below the bid, and it gives me that offset.
What I decided to do was change that hotkey from sell full to sell half. So I changed it to a sell-half hotkey. Just by doing that—changing it to sell half instead of bailing on the full position—I would just take a little profit off the table. I’m taking half off the table, and I’m holding the rest.
I know that doesn’t sound like a lot, but it actually made a huge difference for me because it got me into this habit where I would give in to that impulse to take some off the table. But instead of selling the whole thing, I was just selling half. So I’m taking half off the table, and then I’m holding the rest to see if we get a bigger move. And of course, sometimes we do, and if we don't, then I can stop out the rest usually break even or something like that.
So, I would say, let’s see. These are steps in general that you can take. These are on the loser side, and then on the winner side we've got sell half versus full. Setting stops is also something I did. Now, that’s not something that you can do pre-market, as you know, because there’s no stop orders pre-market.
But setting stops as an automatic order as soon as I got into a trade—just pressing a hotkey to set a stop, which I set as Control-S—immediately puts a stop on the trade. What I started doing was using those stops when I was trading with small size and conditioning myself to get stopped out and have it not be a big deal.
So I let myself take a lot of really small losses—stop losses as small as 10 cents. As soon as I get into a trade, I press that Control-S, I set the stop, and if I get stopped out, then I ask myself, "What was wrong with my entry?" Because my best entries work right away. If I'm really getting in at the apex point, I'm getting in when the price is going to break a level and it's going to squeeze, and it shouldn't drop 10 cents on me.
Now, it’s not impossible that it would, and the trade would still work, but the best trades work immediately. So getting stopped out for a 10-cent loss or even making it tighter than that—a 8-cent loss, as long as you don’t have a big spread—can be a good way of just conditioning yourself to experience tiny losses.
When you're doing that with 100 shares, you start to just get comfortable with it: "Alright, I took a small loss; took a small loss; no big deal." It also trains you to get more dialed in on your entries. So selling half a position versus full and setting stops—both of these help me bail out of the losers faster and hold on to the winners a little bit longer.
Now, something else that I started to do as well is when I take a trade, I often double my position. You've probably seen me do this before, and this gets a little bit more advanced for beginner traders. I think for most beginner traders, the best thing to do is to have one button for adding and one button for selling.
But scaling in, which is when you add to a winner and scaling out, which is when you take profit by half and half and half is a good technique. What I learned was that on my trades that are working the best, where I get into a trade and I’m immediately up more than my 12- or 15-cent average winner—right? As soon as I’m up more than 15 cents, if I get into a trade and I’m instantly up 30 cents a share—which, look, that happens sometimes—there are two ways to approach it.
On the one hand, I could go ahead and take half off the table, and it’s a 30-cent winner on half position. On the other hand, I could double my position and move my max stop to my average price. Now I’ve got a double position on a trade that is already working in my favor and my stop is break even. So if it goes to break even, okay, fine, I’m out of the trade, but if it goes up another 15 cents, now I’m getting a full 30 cents, potentially 40 cents of profit on a double position.
That’s where I’ve been able to really scale up my strategy, which makes sense. You can scale up your profits by scaling up your position size. So being willing to take a little bit more risk and increase my size—that has been key. Everyone has to trade within their comfort zone. If you’re not comfortable taking big size and scaling up, then you've got to be where you’re at right now.
For right now, you can maintain—you can achieve better metrics here just by focusing on these five steps: the three for the average losers and the two—well, this one’s sort of average losers too—so just these five steps. If you implement these five steps right here, the result should be that your average losers get a little bit smaller and your average winners get a little bit bigger, and your accuracy improves.
Now let’s go back to this trade on JTI. So JTI this morning, I'm sitting right now, by the way, up just a little over four times my daily goal. So I’ve got my daily goal, which I come in every single day kind of focused on. I’ve got to hit the daily goal; I want to try to work my way up to this level. The first trade of the day today—well, actually, let’s go back. We’ll do a recap of the whole day, and we’ll kind of use this as a case study of how I cut my losses on each of these trades.
The first trade was LFW. This is my P&L for the day right now. So LFW hits the scanners this morning at approximately 10:07. I pull it up, and I saw that there was news on it.
Now the news headline is a little silly, if we’re going to be real. So let’s see. The news headline on this was announced $2 million pharmaceutical litigation settlement and ongoing settlement negotiations with multiple P&C insurers, pharmaceutical and medical device manufacturers while advancing efforts to combat systemic medical waste, which aligns with initiatives of the newly formed Department of Government Efficiency (Doge).
That’s a very long headline, by the way. They probably almost came up on the character limit. But anyways, interesting headline. The stock spikes up. They’re kind of trying to piggyback a little bit on this change in administration that we’ve got going on right now. Initially, as it pops up, I’m thinking, "This is kind of silly. I don’t know if this is really going to work," and I'm telling myself I’ve got to be a little bit careful on these because I’ve caught some where they pop up, and I end up getting smoked.
So it ends up going up here, 7.12, 7.13, 7.14, all the way up to a high of $2.30. It pulls back; it dips back down right here, and when it comes back up right to this area and comes back up to the volume-weighted average price, I started to get interested. This orange line is the volume-weighted average price; when the stock is above it, it's bullish; when it’s below it, it’s bearish. As it broke above this level, dipped down, I had my order to buy right here at 2.10.
The problem for me was that what I was waiting for on a one-minute chart was a red candle. I wanted a red candle because I wanted to buy a pullback. By buying right here at 2.10, I felt that I was risking too much because it had already gone up for three candles in a row from 1.85 all the way up to 2.10. So I wanted to see a red candle, a pullback, maybe two, and then get in.
We didn’t get that; we didn’t get that red candle. It just went all the way up to a high of 2.40 and then 2.50. As a result, I watched it squeezing higher, and I thought, "This is great to see, but I've got to be able to manage my risk on this trade."
So what I ended up doing, I took my first trade—well, we’ll do it on the 10-second chart. I took my first trade when we got this pullback right here. So we rally up, we pull back, and right here was where I took my first trade. Now, this is a little bit more of a proper pullback. We pulled back a little bit more, and so I jumped in there.
On this trade right here, we spiked up from about 2.25 all the way up to 2.50, which was really nice. We then pull back right here, we come back up, we hit 2.50; we don’t break it. We pull back, we come back up again, we hit 2.60, and then we drop.
I cut my loss—well actually, this was a winning trade, so I got out with profit, but it wasn't the big winner I hoped for because it didn't hold over the half dollar of 2.50. But rather than hold and hope, I just got out. I took my small base hit. I said, "Whatever, it's a green trade; I don’t need to overstay my welcome." And I locked it up. So I was up $1,200 on those first trades on LFW.
Again, it's not a home run; my daily goal is 5,000, so it's only 1,200 bucks, but I'm starting to build my cushion on the day. Alright, now I’m in the green on the day, I’ve got two winners, and they're both relatively small winners, but it's fine.
Next trade, the next stock that hits my scanner is SBFM. So SBFM hits my scanners, and I look at that and I think, "Alright, we've got news here: 8 a.m. Sunshine Biofarma launches a new genetic prescription drug." Alright, that’s the headline. It starts to pop up, and it makes a pretty nice squeeze right here, as you can see. So it ends up going from a low of 2.20 all the way up to 3.10.
It pulls back, we get a dip right here, dip, and it goes back up to 3.10. Not bad; that’s a nice little trade. Is it a home run? No, it's not a home run, but it's not a bad trade. Unfortunately, it couldn’t hold $3, so that psychological resistance level—it broke above it, but it couldn’t hold above it, and it came back down.
With especially with higher volume on that red candle, I got in; I was looking for that squeeze; it didn’t happen, and I got out. So this again is a small base hit. Now, I don’t want you to think that you shouldn’t take small base hits. It’s okay to sell your winners if the chart is giving you an exit indicator. If you're seeing a topping tail, if you're seeing a big seller, if it broke a resistance level and came back below, it's not holding—those are all valid reasons to sell.
There’s nothing wrong with selling in those instances; that makes sense. Even if you’ve only been in the trade for two minutes, if you’re seeing an exit indicator, then it’s the right thing to do to sell. The problem is a lot of beginner traders sell, not because they see an exit indicator, but because they’re scared. They're scared of their winner disappearing, and that is a problem.
That is going to hold you back. You don’t want to sell until you see a valid exit indicator. So on SBFM, I saw a valid exit indicator and I got out. And on that same note, you don’t want to be someone that holds even after seeing valid exit indicators because you’re getting stubborn.
I say that understanding that we all do it from time to time, even myself, because I’ll get stubborn, get emotional, and say, "No, I don’t want to give up on this thing." But nine out of 10 times, it just results in the loss getting bigger. I always think back and realize I should have just cut the loss because as big as it might have felt at that moment, holding it only made it bigger.
So the right thing to do was just to cut the loss, and if the loss was too big, then maybe I took too much size on that trade. That’s something to look at as I’m, you know, sort of working on improving my strategy and adapting it and adjusting it to different market conditions.
So after those first two stocks I traded today, I was up about $3,000, which is good. It’s not my daily goal, but you know, broke the ice. JTE AI hits the scanners next. So JTE AI hits the scanner with news at 8:30, bottom of the hour, and it initially pops up on lighter volume. I said, "Uh, I don't know, guys. I'm not sure if I can work with this."
So it popped up right here—lighter volume—up to about $7.80. It dips back down. I watched it right here; I thought about buying, but the total volume was very light. When you have a stock that has light volume, often what goes hand in hand with that are bigger spreads.
That was the case with the stocks; we had bigger spreads. So as it starts to pop up here, it pops up to right here, it dips for a second, and I took my first position at 8.40 and at 8.34 and 8.40. So I got filled about just under 2,000 shares, which was a partial fill, and it goes all the way up to 9, so just like that it locked up about $600 on that first trade.
Then it dips down again right here, and I take the next trade. We get a squeeze up to 9.50—not bad. We dip down again, I take the next trade and we squeeze up to over 10. So what I like to do as much as possible is buy on pullbacks.
If I'm feeling aggressive, I’ll add for a high a day break, especially if we’re going to go parabolic. That means increasing my position size but potentially doubling my profit and then taking profit as we come up to either psychological resistance of 9.50, 10, 10.50, 11, or just waiting until I see a valid exit indicator.
Now in this case, the topping tails were a bit of a cause for concern because the stock was popping up and then dropping back down, popping up and dropping back down. So it ends up pulling back, dropping back down to 8.60 down here, rallying all the way back up to 10, which was impressive—micro pullback here at 10—but there was a seller there. This was resistance; it tried to break above it, and it couldn’t.
In fact, I took my biggest position of the entire day for the break of 10. I was like, "Alright, here we go." I was thinking, well, I think I already said this at the beginning of this episode. What I was thinking on that trade was we just had this first leg up; this stock has a low float. That’s the first leg up; I'm looking for the next leg to be potentially equal size. That would be amazing, and even if it's half the size, I'm still looking for a move up to 12 to 13—right?
Maybe 11.50 to 12, so I was thinking a break of 10, this would immediately go to 11, micro pullback up to 11.50, 12, micro pullback to 13. That’s kind of what I was thinking. So I was sizing up for that bigger move, and then all of a sudden there’s this wall—there’s a wall of sellers at 10 on the ask, and there are traders buying at 10, and I'm buying too, but 10's not breaking.
So now we know that we've got an iceberg there. Someone is selling a big position; they’re hiding their orders; they’re not showing how big their position is, and the wall's not breaking. It breaks for a fraction of a second; it dips back down, and I realize because of the way it broke and immediately more selling comes in, I’ve got to get out.
I got to bail. On that trade, I was up in unrealized profit because I had a profit and then I doubled the position, added to it. So I had profit and I let it disappear. That was an exchange for the potential that this could have been a big trade, but I ended up stopping out, more or less break even.
So it didn’t—I didn’t lose on it; it wasn’t a big loss, but it would have been if I had kept holding. If I had kept holding, that could have ruined my entire day. This is the problem that a lot of traders will face: they’ll take maybe, you know, 10 trades in a day, and the first eight of them are good—maybe eight winners in a row—and then on the ninth trade, they give back everything they made on the first eight. Then on the 10th trade, they're emotionally fueled, emotional hijack, and they throw all their money into anything moving.
Then they go from green to red on the day—they've got 80% accuracy, but they're losing; they're losing money. What's the problem? Their average losers are five times their average winners. I say all this because I've been through it myself. I’ve gone through those emotional roller coasters; I’ve done it. My hope is that by sharing the experiences that I've been through with you, you’ll be able to learn from my mistakes and avoid making those mistakes in your own trading.
Now, if you're currently in a place where you’re going through these roller coasters and you’re, you know, in one day or whatever it is giving back weeks of profit—you’re having those kind of big spiral events—I would really encourage a couple of things.
Number one, for sure implementing these five rules—I think this is important—but number two, perhaps even more important, is reducing your share size. Because just implementing these rules—they’re important, but to be honest, if you don't also reduce your share size, you're probably going to have a hard time following these rules.
As soon as you take that first trade tomorrow, you know you buy a stock and all of a sudden you’re down 2,000 bucks immediately—all the emotion from the previous loss comes rushing back. You’re immediately triggered; you’ve crossed the point of no return. You are now emotionally activated, and it’s over. All the rules, all the good intentions you set are gone.
It’s because what the market did is it just hit you in the face. When you get kicked in the face, you get a fight or flight response; you're going to do one or the other. You know, maybe you freeze like a deer or something or one of those goats that faint, but hopefully that’s not you. You’re going to do something, and it’s either fight or flight or freeze.
Now, if you fight, that’s where you’re just immediately going to start overtrading—revenge trading, just aggressive, boom, boom, boom, boom. The flight in trading isn’t really going to help you because you’re going to shut down completely. You’re not going to take any trades; you're going to shut down. And the people that trade from that standpoint can have a hard time with loss because trading is a career where you have to get comfortable experiencing loss.
But in any case, you get that punch; you get that hit in the face, and the immediate reaction—now your logical brain is gone and that fight or flight part of your brain has taken over, and it’s a survival mechanism that we have—that fight or flight response. But in the context of trying to trade in the financial markets and do this thing, which is fairly complex and requires a very high level of self-awareness and self-control, the fight or flight response will not help you.
What you need to do instead, if you've been in this period where you've been going through these roller coasters, is you need to size down. I know that it’s hard, and I know so many traders will say, "Ross, I’m not going to size down. I can’t afford to size down. I have bills to pay." There’s no point in sizing down. If I size down to trade with 100 shares, I’m not going to make any money. What’s even the point of showing up?
All of those excuses are coming from a place of the fear of missing out. You’re afraid of missing out on a potential profit or you know, you’re stressed with bills you have to pay. But that stress and that pressure is not going to make your trading better. I know some people say, you know, under pressure is when they perform the best, but that’s rarely true in the case of the financial markets. This isn’t something that you can muscle your way through.
This isn’t like, you know, trying to carry more loads of bricks to the job site. You can’t just muscle your way through trading. Trading is a profession that requires discipline, and you can muscle your way with discipline, but it requires a tremendous amount of discipline—the ability to follow the rules, the rules of your strategy. Some of these rules I’m sharing with you right here, some of these guard rails, are really important.
So I really encourage sizing down—bringing it down to smaller size. Look, if you end up having a loss on your first trade once you’re implementing these rules, it’s not a tap on the face; it’s a bug bite; it’s nothing. It’s nothing you’re going to get worked up about, which is important because you don’t want to have that emotional reaction.
In fact, I have these allergies. I do allergy shots, and you know the idea is to give you like the most without giving you kind of a big reaction of the thing you're allergic to. And with trading, you know conditioning your body—you’re ramping up, and you keep going a little higher, a little higher, a little higher.
What I’m used to now with my injections is probably way higher—I don’t know what it is—than when I first started getting them. With trading it’s similar; you’ve got to condition yourself with these small losses where you get comfortable with it, and it actually becomes no big deal. You don’t even care; it’s nothing!
But you can’t stay there. You’ve got to keep pushing a little higher, a little higher, a little higher, and so all of a sudden you look back, and now you’re trading with 1,000 shares on every trade you take, and now your emotional response to having a loss with 1,000 shares is nothing.
You’ve gotten comfortable with it, and you start going to 1,500 shares; you start going to 2,000, 3,000, 4,000, 5,000; you just keep ramping your way up. And then all of a sudden, next thing you know, a couple years have gone by, and you're hitting the market with 10, 15, 20,000 share positions, and on a good winner, you're up five grand. It’s like, "Whoa, where did this come from?"
So you just have to slowly condition yourself to getting comfortable. And if you’re in a place right now where your immediate reaction is emotional response, you’ve got to go way back down. I know it’s not fun, but it’s the right way to do it; in fact, it’s the only way that I’ve seen really work for people.
The longer you refuse, the deeper you’ll dig the hole. When you’re spiraling, it’s just as simple as that. I’ve seen this with so many traders where they’ll be in this place where they’ll have a series of wins, and then they’ll have a loss right here, and it’s a decent size loss—maybe this is a month of progress. They give back like a quarter of it, and then they keep trading aggressively; they have a little bump up, and then another leg down.
Now they’re getting really pissed, so they take another little bump up, another leg down; now they’re like, "Oh my god, I’ve just given back everything I made in the last... This could be a year, it could be six months, it could be a week, doesn’t matter."
But the bigger the time frame, the more emotional it is. They just start really digging the hole deeper and deeper, and it’s not until they hit what is rock bottom for them. Rock bottom can mean, "I got to add more money to my account; this is crazy."
Rock bottom can be, "I’ve got to go sell my car to fund my account." "Do I even want to do that? That means I don’t have a car anymore." You know, whatever it is. It’s like, "This is really serious." But that becomes the catalyst. This is a catalyst right here for discipline, for getting really serious about following these rules because you realize that success is at your fingertips—it’s in your hands—but you have to follow the rules.
Then you start rallying back up. Once you implement discipline, you think, "Gosh, if I could time travel back to right here, what would I do differently? What would I do differently so I don’t go on this five-leg down pullback? What could I have done differently?"
The biggest thing you could have done differently right here is size down. Reduce your size because when you keep muscling into it with full size, the loss is just going to get bigger and bigger.
So if you size down right there—which is exactly what I did last week—about a week ago I took my biggest loss of the year. Now I'm not immune to taking losses; it’s going to happen to me too. I cut my loss real quick; I was out of it, but it was a big loss because I took big share size. So I took my loss, and I sized down.
For the next two days, I was trading with smaller size, and I did end up having a day that was like a break-even day, but then I had a couple days that were small winners. After three days, I’d made back about half of what I lost, and that gave me a sense of confidence. So now I was back; I was following the rules through all of this; I sized down, and even when I took a loss on whatever it was—day two or day three after the big loss—the loss wasn't huge, so I didn't get emotional.
I continued following my rules, and then next thing you know, I've got three, you know, four days. I’ve made back half the loss; I’m feeling more confident. We happened to get a stock that was strong, and next thing you know, I’ve got a nice big green day.
Pull back; next thing you know, boom! A couple big green days. This is almost what my equity curve looks like for the last seven days. So I’ll pull it up for you so you can take a look.
Let’s see it’s right up here. Again, I mean this is my ability to take that loss right there and then rally back up, which this was the loss, and then rally back up. This was the loss back here and rally back up. My ability to do that is because I’ve gone through this so many times that I just know as soon as I have that big loss—that outsize loss—oh, alright, I know what I’ve been here before.
I know what it’s time for. I sometimes say it's time for me to batten down the hatches. I made something similar in an episode last week where I said, “Batten down the hatches."
Imagine right now that, you know, you live on some island in the Caribbean and the storm clouds are coming in; it's starting to sprinkle and you’re finding out we’re going to have a big hurricane. You had plans for the next few days. You were going to do a bunch of gardening; you were going to work on—let’s pretend you’re Cast Away like you’re on an island; it’s just you. You had plans for things you were going to do, but you know what? All of that is out the window right now.
It’s about survival. I’ve got to hunker down; I've got to batten down the hatches, and I've got to weather through the storm. I think about that with trading because with trading, it’s very hard for us to accept that I’m no longer going to have huge success in these next three days or next four days while I’m in this recovery because I’m sized down.
But when I think about it as this is about surviving, and this is what I have to do to survive as a trader, then it’s not a choice—it’s really not a choice. This is the only way forward; I have to do this. It also reminds me, because these losses are self-inflicted to a certain extent, that I need to be more careful in the coming weeks to make sure I don’t repeat the loss that just dug this hole.
Sometimes it’s a case of I took a high-risk trade; I got a little complacent; I got a little sloppy. I’m human! I took a trade I probably shouldn't have taken, and I took a big loss. So who do I have to blame for that? Myself, right? I mean, it’s not a hurricane. With a hurricane, you don’t blame yourself for a hurricane; you know—it’s just that it’s an act of nature.
But the similar situation is that there’s really only—it’s just a survival approach because one of the things I’m a firm believer in with trading is that this is a career of survive till you thrive. You know, you think about all the people that start trading on day one. Here, all these people start trading—and I guess I don’t know what the line is exactly—but if you said the number of days, maybe down here, so how long you’ve been trading—or even number of years, whatever—but you know, let’s just say it’s like a thousand days.
So you’ve been doing it for like three years. So this is a thousand days. Then this is maybe profit. My guess would be that you would see most people who are making money have been doing this for longer.
It’s going to kind of be like this, and you might even see in this area, you know, this is like your negative line where you're down to minus money.
It’s not unusual in those first few months or even few years, depending on where you’re at and how you’re learning, and what strategy you’re trading, that you’re going to be struggling. But I generally feel like there’s another line here of total number of traders, and unfortunately, you start with this amount and then people just start giving up. They give up; they give up quickly.
You sort of base out down here or something. You’ve got to do everything possible to avoid blowing out of the market because I think about sometimes traders that I’ve known who came in; they went hot; they traded so big in the first few months and made money, and then they lost it all.
It was like a whirlwind, and within six months, they were out of the market. It’s like, "Wow, if they had just slowed down a little bit and brought down the share size, would they have had that crazy, you know, luck—beginner’s luck? $100,000 of profit? Probably not.
But anything they made on beginner’s luck, they gave back anyway. So you were overconfident. So you might as well build the right foundation, which is start with the education, start with smaller share size, start in the simulator, and then slowly ramp up and buy yourself more time in the market.
Now, if you have the benefit of having a second job or you’ve got a primary source of income and trading is secondary, that’s going to position you even better. The money you make from trading is great, but you’re not depending on trading profits to pay your bills today.
The traders that come in and they’re like, "I need to make this money today in order to pay my bills," those are traders that are setting themselves up for failure in a lot of ways because they’re coming in with a lot—they're putting a lot of pressure on themselves from day one.
Especially if you come in and you know you're like, “I need to make $10,000 a month, $120,000 a year.” I know that for someone who’s been doing it for a long time, $120,000 a year might not seem like a lot, but for a beginner, that’s setting the bar awfully high.
So one of the things that probably increased my ability to be successful was that my standard of what I needed to make in order for me to feel like I was successful was $52,000 a year or $1,000 a week. That was it. $52,000 a year, $1,000 a week.
So, you know, look, $50,000 a year in the grand scheme of things is setting the bar really low. That’s $200 a day. So if I was making that, I was successful because my cost of living was very low in my 20s when I was learning how to trade. Someone else could be making $52,000 a year and say, "This isn’t worth it for me; I’m not going to keep it up."
But you don’t get to make $200,000 a year, $500,000 a year, a million dollars a year, or more without first getting to this point. So if you're not able to be content with this, it might be the best you could do in a timeframe that’s more reasonable, then you're going to give up. I think it’s unfortunate because you probably, maybe had the potential—you could have done really well if you’d given it more time and approached it from the right perspective.
As I sit right now, this year we can look—I’m at 13.9 million gross profit since 2016, and this year, year-to-date, I’m sitting at just under 1.5 million gross profit. My accuracy is about 64% right now, so it’s a little lower this year, which I don’t love, but my profit-to-loss ratio is decent: $769 average winners, $543 average losers, and I’m doing well.
I’m making money; I’m keeping my risk in check. I’ve had some stretches where I made some really quick progress, and then it kind of was a slow grind, quick progress, kind of slowed down a little bit, opened up again here. And right now, I'm on this wave where I'm just trying to ride this as long as possible.
These have been my cumulative drawdowns this year. My biggest drawdown this year was $28,000, so that's the biggest drawdown of the entire year. The last drawdown I had was $11,000; the one before that was $9,000. A drawdown is when you have a red day or a series of red days and it pulls you back off your high.
The last one was, yeah, $9,000; $10,000 off of $1.4 million in profit. I mean, that’s a very, very minor drawdown; it’s not even 1%. I mean, it’s really quite small. So I feel good about that and I think that for me my ability to get to this place in my metrics is without a doubt the result of laying the solid foundation and paying really close attention to what my triggers are so I can constantly work to improve.
Now we could take a quick look at my—actually I haven’t looked at my average winners and average losers this year; the numbers I was referencing were more of my career statistics. But let’s just look at this year.
So this year we’re going to look at winning trades versus losing trades; we’re going to generate the report. The average winning trade here this year is 11 cents; the average losing trade is 11 cents a share. But here’s something really interesting: my average winners are bigger.
How would that work? How would my average winners be bigger even though they’re the same cents per share? Share size. I’m taking bigger share size on my winners. Why is that? Because I'm scaling in on the winning trades. I take the position, and then it’s working, so I add to it.
So my average winners are higher. On the losing trades, I mean, of course, there’ll be some losing trades that I add to and I still lose, but on the losing trades, more often I take my starter position; it doesn’t work, and I immediately cut the loss, and I bail out. So I never go full size on the majority of my losing trades, which I think is worth noting.
Let’s see, so this was comparing winning trades and losing trades. Now this was not comparing winning days versus losing days; this was just trades, and this is not a total of, looks like, 4,600 or 700 trades, so it’s a good number of trades right here.
Look, there are a couple big gains, a couple big losers, and then everything else is just in between. Now if we look at my average winning days and my average losing days, we’re going to see something else here that’s interesting.
So this is year-to-date. Average winning days have made 1.6 million; average losing days total have lost 125,000, which isn’t too bad. My average winning day is 8,300, and my average losing day is 5,400. My daily goal is 5,000, and my max loss is 5,000. So I've been doing a pretty good job keeping my daily max loss about that.
But this is something that's interesting: on my losing days, my accuracy is only 46%. Only 46% on losing days, so I am clearly on losing days not trading well. Now if we go back to the calendar here and we look at that trade just from this, a couple Fridays ago—what’s the accuracy on this day? It’s like 0%. I mean, it says 42%; evidently, I had a couple of winners in there, but clearly, the accuracy was bad.
So on that type of day when I’m not trading well, can I get better at reminding myself to walk away a little bit sooner? I’m glad I walked away when I did, but I could have walked away sooner. The loss got bigger than it needed to be.
This is something that’s a sort of a sliding scale; it’s something you're always going to struggle with a little bit at times—knowing when to walk away and getting better at walking away. But in order to find success in trading over the long term, it’s something you’re going to have to master.
If you’ve enjoyed this episode, I hope you hit that thumbs up. I hope you subscribe to the channel, and I want to remind you, as always, trading is risky; my results aren't typical. So please manage your risk, take it slow, and always practice in a simulator before you put real money on the line. I'll see you here for the next episode real soon.