The Dizzy Trader #1 – The Full Risk/No Reward Method
The Dizzy Trader is just a small side collection of mistakes novice/emotional/overexposed traders do. Not a big serious article collection, but nice observations we made with people contacting us and – of course – with ourselves as well. Today, I am going to write about a trading mistake, by a member of our community, who allowed me to share it along with my analysis. Staggered entries, overexposure and getting out too early – sounds familiar? Then read on.
A BitMEX signal has been posted. Staggered entries. The trader split his allocated funds, 5% of his BitMEX balance over the 5 entry spots. Only the first entry gets filled before the first target hit, which leaves him with a trade size of 1% of his total balance. He is annoyed, it would have been a nice 60% win after all, but with just 1% of his balance, the gains are minor.
The exact same thing happens again and again. He decides to expose more of his balance, changes the allocations over the entries. Suddenly all entries get hit, he ends up with an overexposed position. The position goes into the red. Steadily moving more and more into the direction of the stop/loss. Sweaty palms, increased pulse. Watching the position makes the trader feel very uncomfortable – he just wants to get out of it. “Damn, why did I allocate so much of my balance??” he asks himself.
Maybe the price returns to his average entry. He sets a take profit market order at his entry spot. The price recovers and then hit his entry and he leaves the trade without a loss. After that, obviously, all targets are achieved in one go.
The trader has prolly learned not to overexpose on a trade, and starts the next one with reasonable sizes at each entry. Still the position goes into the red first. Fear of loss. Lizzard Brain. “I am a loser, all my trades just make me lose money” – kind of thoughts come up.
The price returns to entry, the trader hits the market close button in minor profits (which are eaten up by the taker fees). After that first three targets achived.
What happens here? Is the trader dumb to close his positions, just once it returns profitable again?
No, not at all. It is very reasonable as he wants to protect his capital in the first place, but if you cannot effort to lose a trade, well, then don't trade. So, basically protecting capital is always good – you just don't have to leave it on an exchange on Seychelles to do so. The worst thing with this terrible trading habit, that the trader took all the risk to hit stop loss, but has zero rewards on the other side of the trade. Let' see which trading mistakes have been made here:
1, He didn't stick to his plan.
Sticking to the plan, not getting insecure and taking whatever it needs is crucial in trading. Losing a trade is part of the game, if you can't take a loss, don't trade. T-h-e-y a-r-e p-a-r-t o-f t-h-e g-a-m-e!
They can't be avoided. Every trade you take is just your best bet. Basically, you think that Price A (your target) is more likely to happen first before Price B (your stop loss) gets hit. If you are insecure with your position, you likely don't believe/understand the technical analysis behind, or you are overexposed, which basically means your money management sucks. First, you decide a % you want to allocate for a trade. Then you define entry and exit. You set these values up and just leave it running. One of the both will get hit for sure. Using a reasonable amount for the trade makes it much easier to stick to your plan.
2. He was overexposed
A 5% allocation is already high, 10% is extreme. 5% means you need 20 liquidations in a row to burn your account, 10% need only 10 liquidations in a row. But he didn't run the numbers at all – he just let emotions take over as he felt like missing out due to the small allocation of the won trade. This knocked out his ratio. Instead of enjoying the small gains, he bothered about not making enough of the good trade (=GREED). He used more than it was healthy, and of course, once it reached entry again he went out and was happy to have his temporarily “lost” capital back in safe hands. Would he just have stuck to his money management and the trading plan, he could have won a very profitable trade.
3. He was scared of loss
Losing is normal. With every family game you play, with every single time you start your XBOX, with every football match – you always risk losing. But here you have the same equity as before you might say, you lose on a hypothetical level without a physical loss (assuming you didn't place bets). True – here you really lose something, means in case of a loss you have less than before – and that hurts the human brain and the way it works. However, if you ever want to become a profitable trader, you must overcome this. A loss is a loss is a loss – and the same goes for profits. There is ZERO wrong with losing a trade. The overall result is what counts after all. Do you end your month in a plus or in the reds – this is the entire story. A loss is a business expense, nothing more… Get familiar with losing and get happy.
The problem with this issue is that you are basically taking the full risk of getting stopped out against zero rewards. Hence it might be a very stupid approach – especially if this is becoming a habit. Once a habit it will have a disastrous outcome on your account. Folks suffering from this problem should ask them themselves: Am I ready to take a loss? And if the answer is “No”, they should be better stepping off the field.
DO YOU HAVE SIMILAR PROBLEMS WITH YOUR TRADING VENTURE? Contact us in the comments or with our contact form and describe your issue! We might analyze it next..