One Simple Rule to Control Your Daytrading Losses

I often drop in on the Elite Trader bulletin boards to see what traders are talking about and this week a thread titled “Why folks lose money daytrading ES” really caught my attention. The poster “gmst” discusses the finer points of trading the e-mini S&P contract, but his insights are just applicable to the FX Market. I liked his post so much, that I am going to replicate it in this week’s column with one personal observation - ever since I limited my daytrading to no more than 2 trades per day in my “experimental” account, I haven’t even come close to a margin call and in fact just hit new equity highs this week.

gmst - Elite Trader

Why folks lose money daytrading ES

I call this rule of 2 trades per day. Newbies or struggling ES traders, do not take more than 2 trades per day, doesn't matter if you win both or lose both how many points you made or lost. This rule has many benefits:
1. Since you are a struggling trader, so it means on average you are losing money or are just breakeven while trading ES. Taking less number of trades per day first means a slower burn rate. So you prolong the time before your capital falls to zero and this added experience increases the odds to eventually succeed at ES.

2. If you are open to take multiple trades every day (say 6-15 or even more round-trips per day), by simple logic - you would be reversing your position multiple times. Do you know why this conclusion follows? HINT: Answer this: When are 'struggling traders' going to reverse their position? Answer is: Note, by definition you are a struggling trader, so chances are more often than not, you would find your trade in a losing position and thinking that you are wrong on direction, would reverse.

As soon as you reverse, there is a decent chance that price will mean revert and you would find yourself again underwater, thus setting up for reversing again. Vicious circle. Can you see the point? If not, re-read and absorb. This is an important point.

3. Also,being limited to taking only 2 trades per day, you will learn to sit on your butt with your hands tied behind your back, waiting for that opportunity when you are very sure that you see a trade (be it for 1 point or 6 points). This sitting on your hands will teach you patience and result into higher quality of trades.

Above is a generic post applicable to almost all instruments (not only ES) but it is an important post and its easy to underestimate its importance. Struggling traders - you should listen carefully. You will benefit. Good luck.


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