Yo, check it out, as Randy Jackson would say:
A young, developing trader emails me about his performance on Friday. The market gapped open strongly to the upside and he immediately found lagging stocks to short. I can only guess that his reasoning was based on the supposition that "gaps tend to fill", so that he'd benefit when the weakest of the stocks retreat with the broad market.
Lost, of course, was the fact that this was a very large upside gap, very broadly distributed across a range of sectors and issues. If our young trader had actually made a historical study of such very strong opens, he might have been less inclined to swim against the tide. And that 's not even taking into consideration that the market was breaking out of a long-term zone of price resistance.
So, OK, the young trader begins his day on a boneheaded note, at least in my book. His shorts start out profitable and then give back their gains, presumably as the broad market is roaring ahead. What happens now?
This is where our young, developing trader shows that he will someday be an old, experienced trader. He describes a rule he had set for himself, "If a position immediately went against me, if after one hour it was still a loser and not yet at my loss goal, then I would get out and move to the next trade." In other words, he doesn't wait for the position to put him deeply under water and he doesn't fight the market and add to his position out of frustration. He just moves on to the next trade.
But, as Randy would say, this is where our trader is hot: His "next trade" involved buying calls. Our young, developing trader flipped his position and aligned himself with the market direction. He took the time to reassess and then found opportunity based on what the market was doing, not based on what he thought the market *should* do. By 9 AM, he had turned his head around, setting up a profitable and successful trading day.
Compare our young trader with others who wrote to me after fading the market all day Friday. Their refrain was that the market *shouldn't* be rallying because economic fundamentals are so bad, earnings are so weak, etc. They were so locked into their opinions and scenarios that they couldn't see the lopsided nature of the day's trade.
Hey, we're all going to lose forest for trees and make some boneheaded calls. I could regale you with dozens of my own. What sets apart the traders with longevity is the ability to quickly recognize these mistakes and make mid-course corrections.
To have a strong enough ego to aggressively take on risk when you feel conviction about an idea, but also to have enough lack of ego to let go of those ideas when they're not working: that's a huge part of success and the mindset of an expert trader.
Oh, and by the way, our young trader concluded the email by emphasizing other mistakes he had made and wanted to work on next week. He's only been a trader for a few months and already he's coaching himself and preparing to put me out of a job.
I love that kind of unemployment. It keeps me well employed.
Becoming Your Own Trading Coach
Letting Profits Run by Coaching Yourself
Programming Your Experience as a Trader