What Would A 5th Grader Do?
September 29th, 2019 | 7 minute read
If you explain to a fifth grader, that you have two boxes. You will give them $10 to put in one of the two boxes. The boxes will glow green and red. If the box is green then the money that you put in will gain more money. If the box turns red then their money will start decreasing. You can see where I am going, right? Furthermore, if it does turn red, they are allowed to take out and hold the cash or put in a box that is glowing green.
Now this un-scientific experiment did not happen. My hypothesis is that the 5th grader WILL take out the money as quickly as they can and either hold the cash or wait for the glowing green box so to get more money.
Similarly, before I ever took my first trade, I thought, if the trade goes against me I will close out immediately. At what point does a new trader experience the "Slope of Hope"? That is, they don't close their Long position when the trade goes south. In the heat of the moment, hope creeps in and you say, this will turn around. OR, because of my superior analysis, or arrogance, I say, "there is no way this is going to drop much so stay in until the pull back is done". I know I am not alone here. Happens to all beginners. Professionals are impatient with losers and close their positions quickly.
The most basic concepts can be the most difficult to master. Let your winners run and cut your losses short. Ok, I have stated the mantra. Big deal. This does not help you nor me following this concept like the pros do. Let's dig deeper.
Not selling your losers is a bad behavior issue. I came across this TEDx Talk, How to motivate yourself to change your behavior . The essence of the article is our brains do NOT respond well to warnings. Especially teenagers and adults over 40, based on a study. In our situation we are warned if we stay in this trade that is failing it will fail more and we will lose more money? One of the reason we don't respond to warnings is because our brain has a distorted positive view of ourselves. I imagine this carries over to our opinions and predictions. My stock direction prediction could not possibly be wrong. WRONG! It most certainly can.
The TEDx talk further explains to not fight your brain but go along with what your brain responds to. Three principles for working with your brain to change your behavior. 1. Social Incentives, 2. Immediate Reward and 3. Progress monitoring. An example of social incentive is highlighting what other people are doing. The UK government added one sentence to their tax collecting letter. "9 out of 10 people in your county pay taxes on time." This one sentence increased, on time, paid taxes by 15%.
Another example was the medical staff at a hospital is supposed to wash their hands before and after seeing a patient. Even with a camera on the washing sink, only 1 in 10 completed the task. After mounting a TV with a score board did the participation increase by 90%. Now Social incentive of everyone viewing increased the completion of the task. The scoreboard also immediately increased the count after washing their hands. This was an immediate reward. Finally, the scoreboard gave weekly statistics showing progress. Progress monitoring is important just like keeping our stock trading journal.
Before we explore to far, let's review the basics of entering a trade. Before entering a trade, the trade must meet our criteria of our setup. You must plan your trade and trade your plan. You must have pre-determined stops for your stop and profit taking stops. The profit taking can be scaling out with trailing stops. MultiCharts.net does have Auto stops placed when you start an entry. You have to ensure it is turned out to work correctly. Also, as soon as the stops are in place you need to match them to your Support and Resistance (S/R) lines. Auto stops are simply a percentage placement when you enter a trade. For example: My stops are -.5% and scale out profit taking are 1% and 2%. Of course this won't match your true analysis of (S/R) lines and this is why you have to move them appropriately.
In my case, I post my trades in my daily summary. I can count that as my social incentives. Everyone can see my charts and my entries and exits. Next I will add a column to my journal and reward myself by adding 1 point to the column when I exit immediately. Maybe the column will be named "Exited Immediately". Another column, "Did not Exit Immediately". Possibly a third column, "Reversed" Finally, I can run daily, weekly and monthly statistics for progress monitoring.
Remember not to get hung up on having a high win rate percentage. It helps but if profits are larger than losses, you can be right less than 50% of the time and still make a profit. For a long time I pushed to be more accurate with a high win ratio. I admit, my profits were not as high as my losses in the beginning. The referenced TEDx talk did mentioned this might not be a fix for every bad behavior but they did see incredible results with this method.
You may call yourself a day trader, but in the end your number 1 job is a risk manager.
Trade well friends