Hit a home run on your last trade? (RH anyone?)
Great! Now ignore it before you place another trade.
Get smacked on your last trade? (NVFY anyone?)
Too bad! Not every trade works. Now ignore it before you place another trade.
Before we go on, I’m making two (2) assumptions here:
1: You’re trading proven A+ Set-Ups.
2: You’re following all your rules.
What happened with your last trade has ZERO, that’s right ZERO, effect on your next trade!
The only way your last trade will influence your next trade is if YOU let it.
Too many traders just don’t get this. Many understand the basic principle but can’t bring themselves to come to terms with it. And it’s those traders who are the ones that are most likely to spin their wheels. They don’t really lose a lot of money but they don’t really make a lot of money either.
Here’s what usually happens:
You take 2000 shares of XYZ. Not only does the trade not work but the bids completely drop out and you take a $.30 loss on all 2000 shares. Now you’re down $600 plus commissions.
What usually happens next depends on whether you’re a risk taker or a risk avoider.
The risk takers will feel like they must get that money back on the next trade. They will double up and take 4000 shares the next time they trade. This is great IF the next trade works, although I would argue they just reinforced a bad habit. If the trade fails, they’re down even more, a lot more.
One other scenario for the risk takers is they throw all their rules and set-ups out the window and just saw "WTF?" on the next trade(s). They're quickly consumed by getting their money back. Nothing else matters. This is usually the beginning of a mini death spiral.
The risk avoiders will become overly cautious and cut their share size in half and only take 1000 shares on their next trade. The problem is they now need those 1000 shares to move $.60 just to recoup their loss from the first trade.
One other scenario for the risk avoiders is they don’t take the next trade. They’re too afraid of another loss. When this happens they usually miss a trade that would have made their day and/or week. Remember: the trades that cost you the most money are the ones you don’t take! Read about that HERE.
What should you do?
If you’re in this for the long haul and you want to be a consistently profitable trader: Stick to your plan. Stick to your process. If your plan is to trade 2000 shares every time you see a gap play set-up on a stock under $15, then trade 2000 every time. Don’t deviate from the plan. Stay consistent. Just because you won or lost on the last trade, doesn’t mean you should change your share size! Why would you? What if the next trade is “the one”? Or what if the next trade doesn’t work?
Certainly don’t let the last trade keep you from taking the next trade. EVERY time a stock sets up and meets all your parameters, push buy. Every time! The next stock you’re trading doesn’t care what the last stock did. You shouldn’t care either.
All of this can play out after a winning trade too. Say you trade 2000 shares of ZYX and you make $.30. You’re up $600. Now you get a little rush of adrenaline from your nice green P&L. You get a little too confident. Next trade 4000 shares! You’re feeling good today after all. However, that trade doesn’t work and goes against you $.15. You just lost $600 and you’re back to ZERO. Had you just stuck to your plan and traded 2000 shares you would have only lost $300 and you’d still be up $300 on the day! Still being up $300 is a lot better for your mental state than giving it all back. Now, next trade…
I can’t emphasize enough how important consistency is in the long-term. You can’t jump all over the place. You can’t trade 20 different types of set-ups. You can’t just wing it. You can’t buy 500 shares one trade and 5000 on the next set-up that looks just like it. You may get lucky occasionally, but that’s just luck, not a long-term viable trade strategy.
Please understand it took me a while to get this and even a little longer to really engrain it in my brain. I constantly remind myself of this after every trade, especially after a larger loss since I tend to learn towards being a risk avoider.
Remember, your edge is in your head™. A big part of your edge needs to be consistency.
One last thing: At the end of your day, don’t ignore any of your trades. Review them all. Put them in your trade tracker. Spend some time understanding what you did right (repeat that tomorrow) and what you did wrong (don’t repeat that tomorrow). Did you follow your A+ set-ups? Did you follow your rules? Ignore this part of your day and you’re very likely to keep spinning your wheels.
Thanks for reading! Questions? Comments? Reach out!
PS: If don’t adhere to the two (2) assumptions made at the beginning, immediately stop what you’re doing. Cut down your position size and evaluate what you’re doing. Please!