You have to figure out if you’re trading to win or trading not to lose. You need to trade to win. A bird in the hand is not worth two in the bush. You don’t have an edge. Every trade is a coin flip. Your only edge is trade management: cutting losses short and letting winners run. Don’t double down. “… quite a few participants felt that some sort of doubling down, or Martingale betting strategy, was optimal, wherein the gambler increases the size of his wagers after losses “ Keep your bet size consistent and in line with your bankroll. You have to be able to lose and lose and lose and lose and lose and keep your bet size consistent. You want to bet bigger to “make it back,” and you want to get revenge, that’s only human nature. Recognize the urge and resist it. Hide your P&L to conceal both your losses (which are known, but cumulative) and gains (which are unknown).
When I was a kid I worked as a photocopy boy in an H&R Block office. They offered something to customers called the “Rapid Refund,” which was a high interest loan on a tax refund. People would pay the $20, $30 whatever fee to get their $100 tax refund a month earlier than normal. This struck me and the lesson it taught is forever in my mind as I trade.
“… individuals’ usual tendency to attribute winning performance internally and losing performance externally“
I have no idea why the academics call it the “disposition effect,” but it’s natural for human beings to cut their profits short and let their losses run … it’s also human to attempt to add to a loser to dig yourself out of a hole. The struggle against your own natural tendencies is real and all-important.
Trying to find something that works, you’re going to go down a thousand dead-end roads. Be willing to give up on your cherished ideas when they prove to be worthless. Every one of your brilliant ideas has already been tested and discarded by somebody who is smarter, richer, and faster than you. Don’t be naive. You might think for years that VWAP or Fibonacci or Elliott Wave or whatever is the end all be all, so you won’t be able to drop the idea even when you find no value in it. You have to be able to cut your losses in the idea realm too. Sunk cost fallacy is real.
From Tom Basso: “When you find the proper level [of dollar risk] to trade for you, everything will seems easier and less stressful. If you are just starting out, start with as small a size as you can. As you are successful with trading and are starting to notice a long run of sticking with your strategy, having discipline, and feeling comfortable with the process, you can always dial it up a little at that point. The more experience you have, the more size you can tolerate and still feel comfortable that you are right-sized. Err on the conservative side.”
From Jack Schwager’s interview with Stevie Cohen:
“Q: Has that been something you were always able to do—that is, turn on a dime when you think you're wrong?
A: You better be able to do that. This is not a perfect game. I compile statistics on my traders. My best trader makes money only 63 percent or the time. Most traders make money only in the 50 to 55 percent range. That means you're going to be wrong a lot. If that's the case, you better make sure your losses are as small as they can be, and that your winners are bigger.”
“Use a wider initial stop (say 3 ATRs) … once the market starts moving in your favor, tighten up the stop … use a time stop as well as the initial wide stop … doesn’t hit proft target or stop within X bars, just get out.” — Linda Raschke
(I’ll add more when inspired.)