The first step to overcoming emotions during trading is to identify the ways in which emotions are harming your trading. These are the most common ways that emotions hurt a trader, and cost him money, and steps to overcome them:
Being Reluctant to Enter A Position When the System Calls For It
This is one of the worst things that a trader can do, and unfortunately it is also one of the most common. Not entering a position when the system calls for it for any reason (burned previously on a similar setup, down on the day, up on the day and protecting gains, not recognizing the opportunity, ect) begets feelings of intense remorse most of the time, especially when the position would have been a big win. It also messes with the winning percentage of a system. If you are not taking positions every time your system calls for you to, then you are missing out on more money over time if your system works. You never want to miss a huge trade because your emotions made you too reluctant to enter into the position.
How To Overcome This
What traders need to realize is that no system works 100% of the time. Even when you do everything correctly, even if you feel like all signs are pointing to a winning trade, a certain percentage of time it will not work. Getting “burned” on a previous trade is a common reason that traders do not take a subsequent position. The problem is that a system is not a system if you do not follow it every time. If your system works, you need to follow it precisely, if your system doesn’t work, you need to shut your trading down and make adjustments in a demo or “sandbox” arena until you can systematicallymake money again.
A trader needs a short memory. Always stay in the moment. Do not pay attention to your profits/losses for the day, and forget about any prior trades. Treat each opportunity as an individual entity, as a part of a systematic way to make money.
Taking Too Large A Position After A Win(s)
This is the flip side of being reluctant to enter a position. Positive emotions can make you enter a position with much more size that your system dictates, because you are “feeling lucky”. This can lead to big losses, and can lead to reluctance to enter future positions at all, or it can lead you to enter future positions with too small of a size. Using too large of a position can lead to a loss that is nearly impossible to return from, or at best a loss that will ruin your profitability for a period of time.
How To Overcome This
The solution is similar to being reluctant to enter a trade. Remember that your system is in place because statistically over time, it works. If you feel that positive emotions are causing you to enter positions much larger than normal, stop yourself, and realize that you have to stay true to what has been proven to work.
Not Cutting Loses Quickly Enough
Amateur traders almost always make the mistake of being overly optimistic about a trade that goes “out of the money”. They think that if they hold their losses long enough, eventually the trade will become a winner. The problem is that oftentimes, the trader becomes a larger and larger loss. This leads to feelings of hopelessness and dejection. If the loss is large enough, it can also ruin your account balance, and make it very difficult to regain a profitable enterprise.
Always have a pre-determined “out point” or “stop loss“. If the trade reaches a loss of a certain size, cut your position or exit your position all together. You must stick to this religiously. If you have the point pre-determined before you enter the trade, it does not leave wiggle room for you to rationalize holding a loss and letting it turn into a bigger loss. There will be more trade setups in the future, endless opportunity is ahead of you. Cut your losses quickly and move on to the next one.
Letting Anxiety Take You Out Of Winning Positions Too Quickly
This is another very common mistake of new traders. They find themselves in a profitable position, but they become very anxious that it will turn around on them. They exit way to quickly, and take what would have been a big gain and make it a very small gain.
The best way to overcome this is to resist the urge to exit positions completely. Instead, exit a smaller percentage of your position (maybe 25%) and let the rest run. This locks in some of the profits and takes away a lot of the anxiety around holding the trade. Over time, you will train yourself to hold your winning positions longer. There is nothing wrong with taking profits, but you have to make sure that you are holding your winning positions for a long enough period of time.
Letting Any Feelings Surrounding Other Aspects of Your Life Prevent You From Following Your Trading System
Day traders are all people (except the algorithmic traders). People have good days, bad days, fight with spouses, have health issues, have other victories in life, and can have any number of things happen in their lives outside of trading affect their emotions. The problem arises when these emotions influence a trader’s ability to follow their system. If you are not following your system, you probably will fail to systematically be profitable.
If you feel like you have emotions (negative or positive) that could prevent you from following your system you need to identify them, and you need to clear yourself of the emotions. Some traders actually meditate, some sit quietly for a few minutes, others may take a walk. Find what works for you, but it is very important to clear yourself of any strong emotions prior to trading.
This is the emotion that no day trader wants to experience, but every trader on their journey to becoming a professional day trader experiences at some point. If you feel like you can’t make money, you probably are not going to follow your system very well (or do anything very well).
Dejection stems from a lack of trust of your system. Sometimes this lack of trust is not displaced, and your system is not working. Sometimes the lack of trust is simply a product of the up and down cycles of systematic profitability. The key is to regain faith that you can systematically earn money from the markets. Take a step back, and use your system in a demo account or with very small positions. If you need to change the system, change your system. Once you regain faith that your system will make money over time, resume trading as normal. You need to have faith in your system to follow it!
Controlling Your Emotions Leads to Success
Only with a clear mind, and a willingness to jump on opportunities quickly will you succeed as a trader. Ask any professional trader and they will tell you that the most important way that they grew as a day trader was by learning to control their emotions. Control in trading correlates strongly with success.
How To Make Money In A Declining Market
You don’t need the stock market to go up to make money. There are a number of ways that you can bet on an individual stock or the stock market as a whole to go down. While this is a speculative strategy (as opposed to an investment strategy) it can provide a useful hedge if you have other long positions, or it can be a great way to make money when conditions are not favorable for a bull market.
When you are betting on an asset to decline in value, your position is known as a “short position“. You may also see a trader who has a “short position” referred to as “being short” or “shorting”. The most common ways to do this are by selling a stock short, by purchasing Put Options, by writing Call options, or by purchasing a Put binary option.
Ways To Profit From Short Positions
Purchasing A Put Binary Option
This is perhaps the easiest way for the average trader to take a short position. A binary option is extremely simple (it pays out a pre-set amount if the trade is in the money, or expires worthless if the trade is out of the money). Binary option accounts are easy to open, can be funded with a credit card, and do not require any special “margin privileges” like a traditional brokerage account that is option eligible.
High Risk High Reward
The trader takes a short position by purchasing a Put option contract and entering the dollar amount that they want to risk on the trade. The “strike price” is determined by the price of the security at the moment the trade is entered. The trade has a pre-set payout amount (usually between 60% and 90% of the amount risked). If the option expires in the money, the trader wins their money back plus the payout percentage designated for the trade. It does not matter how far in the money the option contract expires, the payout is always the same. If the trade expires out of the money, the trader loses 100% of the amount that they risked. In this way a trader can potentially make a lot of money from their short position, but they also will lose their entire position if it expires out of the money.
By using binary options, a trader can purchase put options for different time frames to place a bet that will pay if an asset declines in value. This is a viable way for an average trader to profit from a stock, a market, or other assets falling in price. There are various lengths of time available for binary option trades, usually ranging from 1 minute up to a period of a month or months.
Selling a Stock Short
This is the most common way that traders and investors, and especially day traders, can profit from a decline in prices. A short sale involves selling a quantity of an asset (usually a stock) that the trader does not actually own. The trader will sell at the current market price to the open market, and their brokerage will provide the shares to the purchasing party. The trader is effectively being loaned the shares from the brokerage.
The trader’s account is credited with the value of the sale. The trader is usually charged interest from the brokerage daily for the shares that are loaned to the trader.
When the trader decides to close the position, they purchase the shares back from the open market. If the price of the security has fallen, the trader will purchase the shares back (to payback the loaned shares to the brokerage) for less than what they were sold for. The trader can then keep the difference between the price it was sold for and the price it was bought back for.
Limitation On Profits And High Potential Risk
The highest amount of money that a trader can make from selling a security short is 100%. A 100% profit would be realized if a security becomes completely worthless (the trader would not need to pay back the loaned shares to the brokerage because they have no value). Most assets which are shorted do not go to a price of 0 though. In fact a decline in price of 20% for the most commonly traded securities would be considered significant.
It is important to note that if a position is out of the money when it is closed, the trader does not need to necessarily lose a lot of money. A position which is closed out for a slightly higher purchase price than the sale price, for instance, will result in a very small percentage loss.
That being said, there is no maximum to the amount of risk that a trader is exposed to. While their maximum return is 100%, the price of a security may double, triple, quadruple, or even go up higher in price. While brokerages have risk controls in place in the form of “margin calls”, this is not a perfect system and it does not necessarily limit the risk effectively. If for instance a security closed one day below a level which would result in a margin call, and opened the next day significantly above the price which would incur a margin call, the trader is responsible for paying the brokerage any losses, without limit.
Selling Short Takes More Capital
Because a short sale of a security typically provides the lowest expected return compared to the other ways discussed here to profit from price declines, it takes the most capital on the trader’s part to make money. Short selling can also only happen in a margin approved account, which has minimum balance requirements. While many day traders do engage in short selling, and some are very profitable from it, there are limitations and benefits unique to this form of short position. It is important for every trader to understand this completely before choosing their method of taking a short position.
Purchasing A Put Option (or Writing a Call Option) Using Traditional Options
A traditional stock option works by giving the owner the right to either buy (a Call option) or sell (a Put option) a security at a future date, for a specified price. The option has a value because it provides this right to the owner at a future date (and prices may change between the purchase time and that future date), and it may have a value because it is either above or below the strike price when the option contract is purchased.
Purchasing a Put Option
If a trader owns a Put option, it gives that trader the right to sell shares of that particular stock to the option writer for a specific price on a specific date. If the price is below the strike price, the trader will execute the option. This means that they will buy shares at the market price, and sell them for the higher agreed upon strike price. By owning a Put option the trader is making a bet that the price will decline, and that they will be able to purchase the shares on the open market for below the strike price (which the option writer is obligated to pay).
Returns are Potentially High and Risk is Capped
The benefit of a Put stock option is that they rewards are potentially very high, the highest of each of these methods. A trader has the ability to make multiple times the money that they purchase the option for. If the option expires out of the money, the option expires worthless, capping the risk to the trader at the amount they spend on the option contract(s). Some view purchasing traditional stock options as the most beneficial risk/reward profile of any type of position, for trading purposes. The caveat is that while the risk is capped, an option that expires even slightly out of the money has no value. An option that expires slightly in the money will have a small value, so while the upside has a lot of potential, the expected return may not be high enough to compensate a trader for the risk of losing the entire trade amount.
Every option has a time value, otherwise known as Theta. This is the value in the amount of time left between when an option is purchased, and when it will expire. Time has value because the price of a stock can move over time. The more time remaining, the more potential a stock has to move further into a profitable position for the option. Even if the price of a stock or underlying security doesn’t move, the time until the option expires is constantly reducing. As time passes, the time value of the option lessens. This reducing time value is known as option decay.
Writing a Call Option
A trader can also profit from a decline in an assets value by writing Call options. The trader sells the call options that they write on the open market, and if the price drops below the strike price, the trader will keep 100% of the money he earned by selling the options. If the option is executed in the money, the writer will be obligated to sell shares to the option owner at below market value prices, potentially resulting in a loss on the position.
No Cap On Risk
Because the price of a stock hypothetically has no limit to how high it can rise, the potential exists for very large losses when writing Call options. As an example of how writing a Call option can turn out especially poorly, let’s say a trader writes a Call option (100 shares) for stock XYZ at a strike of $50. Let’s say that the trader sells this option for $2 (taking in $200 of revenue). If the price of the stock rises to $60 when the option is exercised, the trader must sell the owner of the option 100 shares at $50. Because it costs $60 per share to acquire the shares, the trader will lose $8 per share ($10 a share on the price difference minus the $2 a share in revenues from writing the option). This position loses $800, and it only had a maximum potential gain of $200. Writing options can result in unfavorable risk/reward profiles in some circumstances, and traders should have extensive option knowledge before writing any options of their own.
The Best Method Depends Upon the Trader
There is no “best” method for profiting on a decline in prices. There are unique benefits and risks to each style. We use Binary Options because there is a high payout no matter how far in the money the option contract expires. This allows us to precisely control our risk/reward profile. It is also well suited to traders who do not want to put up substantial amounts of capital (as the other methods require).
The highest potential payout is using traditional Put options, but there is option decay, and an option that is executed a little bit in the money will only provide a small return to the owner (who also took a significant risk by purchasing the option and possibly losing 100%).
It is important for every trader to understand the workings of each type of short position, and to thoroughly understand their chosen method. For simplicity and for the predictable payouts on all winning trades, we use binary options. If you would like to become a binary options trader and you need to open a binary option account of your own please sign up for an account today.
Do Day Trader’s Make Their Earnings Public?
The earnings of individual day traders are not usually made public. There is good reason for this, as day trading for oneself does not require any type of public disclosure of earnings. There is not any incentive for most profitable traders to publish their earnings, and if they do not want anyone else to know how they are making money they do not want to attract unneeded attention to themselves.
Usually when an individual trader makes their earnings public, they do so when they are selling a trading system, educational material, or school. Anyone considering paying for a trading education from someone who publishes their earnings should be weary about the veracity of the claims. If, for instance, the trader shows huge gains month after month and year after year without any drops in their account value, it is unlikely that they are being truthful. Every trader experiences losses at some point (unless they are merely getting paid as an intermediary for an institution).
Many successful traders have the occasional massive trade, when they may make hundreds of thousands or even millions of dollars. Unless you know them privately, you will probably never hear about it.
Big Bank Trading Revenues
Many people may be dazzled by the trading revenues at big banking institutions, and believe that this is attainable for them. While this is possible, the revenues generated from trading at large institutions is mostly from providing liquidity to the markets and matching client orders internally and externally (for a profit to the bank.) Banks have mostly been prevented from taking any sort of speculative trading positions from what is known as the Volker Rule. To see the SEC page on how the Volker rule restricts banks from proprietary trading as a part of the Dodd Frank Act, view here.
Large banking institutions are mostly restricted to making money with market making activities (which can be quite profitable for a bank using high frequency trading algorithms but less so for an individual trader).
You Should Not Make Your Earnings Public
If you become a profitable day trader, you should keep your earnings private as well. When you are using a profitable system, there will be many people trying to learn what you do, and how you do it. The more people who learn, the less money available for you (in most cases). If you don’t make money, you probably don’t want people to know that either. Simply put, there is no advantage to telling others how much money you make as a trader. If you want to publish your earnings, you are free to make whatever information public that you wish, but there is a good reason you will have a hard time finding any real traders who do this.
How To Get Risk Free Trades
Risk free trading is the holy grail of day trading. While stock traders have been scheming creative ways to mitigate risk for over a century, they are never really able to eliminate all risk. Even a high tech hedge fund running a high frequency trading algorithm is open to the risk of flash crashes or technology errors disrupting their trading. See the story behind the line of code that almost took down the largest US market maker, Knight Capital.