As we roll into December, it’s inevitable that people start to look back on their year and how they’ve performed.
We tend to look at the new year as a chance to improve bad habits and make changes.
Gym owners across the country will be rubbing their hands in glee as people rush to join gyms on a monthly direct debit with a minimum period, knowing full well that the gym will get used a handful of times and then the person will stop coming.
This is beneficial for the gym owner because not only are they getting extra income but also the membership owner doesn’t attend therefore making the gym less busy. If you’ve ever been in a packed gym, you’ll know why this matters.
You might also see some gyms with little tricks designed to keep the money coming in.
They’ll offer free tea/coffee/fruit/snacks for all members.
Often most members will ignore these – but the use is not in providing sustenance for the members. It’s to keep non-members hooked.
Gym members who don’t go will be less inclined to cancel their gym membership because they’ll lose their “free” access to food and drink that they actually never lose. This is simple loss aversion – and for a minimal cost to the gym owner these freebies keep people paying.
There are lots of other little tricks designed to maximise revenue out of people who don’t bother attending the gym. You might be wondering – why does this matter?
If a simple bowl of fruit and a disgusting hot flask of coffee can influence the mind, what can the prospect of losing money, price charts, flashing Level 2 screens, other traders, market makers, vague RNSs, and your own emotions do? The answer is: quite a lot.
Trading is a psychological sport. Every now and again you will take a loss bigger than expected. Downside risk management is important but nothing is guaranteed. In fact, the only thing you can be certain of is that there is no certainty in trading. And just because you take more than a 1R loss (your expected risk is 1R with R standing for risk) doesn’t mean your entire system is broken.
It’s natural to become gun shy but it’s important to get back on the horse. You can reduce positions by half to get back in the game and scale up once you’re feeling confident. Of course, if you’re able to take a larger than expected loss without flinching then even better. It’s important though to understand the difference between feeling losses and being reckless.
Many traders think that they have to lose large amounts before they can make large amounts. Quite where this waffle came from is beyond me.
Losing large amounts means only two things:
- You’ve lost a lot of money unnecessarily
- Your account size is now significantly reduced
Being emotionless in terms of losses is the best situation. But you should always acknowledge why they happened and do your best to minimise them next time around. Wearing losses as a badge of honour is no use to anyone unless you’re entering a “Biggest loser” competition.
One thing that I like to do at the end of every year is to consult my trading journal and print off my trades (if you don’t keep one, you can download mine here). By having the data in front of you, you can see exactly what you did and why.
The first question is: What were your best trades and why?
Knowing the answer to this question means you can then start a process of finding more of these trades. If you know that these produce higher P&L then it makes sense to allocate more time to do the work to find these specific types of trades.
A second question is: Are you doing as well as you think?
Ever since IG decided to more than double the commission rate on spread bets and CFDs since last November, and ever since a certain broker consistently overcharges on commission (but curiously never undercharges), you may find that your net P&L is significantly different to your gross P&L.
Your gross P&L calculates how profitable you are without fees and commissions. But data costs are a real cost of trading, and so are commissions. You should be sure of what exactly you’re paying and why.
If you do a lot of business with a certain broker – speak to them about reducing your commissions. Don’t be shy. Brokers often invite their clients for lunch, send boxes of wine, or pay for sporting events, but I’d happily skip all of that in return for a reduced commission.
What were your biggest losses and what you can do in future to minimise these?
If you can reduce your expected losses, then you have a bigger runway before you have to stop trading.
What happens after you close the position?
Many traders will either congratulate or console themselves once they close a position, and then pay no attention to the stock from thereafter. This comes from the common advice of moving on to the next trade.
However, what if 95 percent of your trades carry on to profit without a single pullback?
The chances are, they probably don’t, but there is a real chance you could be leaving money on the table that can be identified and captured.
Trading should be a continuous process of testing and refinement, but it’s good to spend time for deep work on your strategy and process, as well as preparing for whatever may come in 2022. Hopefully, not another lockdown.
Michael Taylor
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Twitter: @shiftingshares
