When is Enough, Enough? and Happy Holidays

I'm taking time off until the New Year, unless something major happens in the markets.

On Friday, we saw the volume shrinking. I have never forgotten a X-mas period in, I think, 1981 or 1982 when my head was handed to me. I lost a 100,000 dollars in two weeks. That certainly brought me down to earth. I blamed it on the slow holiday markets, but on reflection it was probably a much less experienced man's lack of discipline and skill. Nevertheless, I usually don't trade over the X-mas/New Year period.

My final post for the year is about an email I received a couple of days ago:

"One other philosophical question....

-When is enough....enough???  My biggest struggle is overtrading.  I am the worlds best trader (just in case you haven't heard of me), but I am the worlds worst money manager. 

-I recently came across a simple "blackjack formula" that went like this...Today I am willing to lose $250 per day and every time I have a winner or loser I subtract that from that $250.  So, if I had 3 winners and was up $200 and the next trade was a loser of $60 then I should be done trading for the day with a net profit of $140 (per contract).

-Now that sounds all fine and dandy, but I struggle with the fact that it's 10am and I am done working for the day.  I grew up in a family where one has to work 50 hours a week to justify what you are doing.  Maybe its the midwest mentality or maybe I have ants in my pants, but I just struggle being done for the day.

-How have you handled this over the years???  I know there has to be others like me out there."

As with many things in trading, the answer is simple but not easy. Trading is a business, not a computer game. The basis of my business is the same as most successful businesses: I have a business plan. As I have written before, my Dad taught me to work with inspiration, not perspiration. My goal in my trading business is to make money.

In writing my trading plan, I had to decide many things, including how many hours a day I trade, whether I have a daily target or daily stop loss, as well as a host of other things.

Making my TP very specific helps my discipline. I try and have as few decisions to make in the heat of battle as possible. I don't want to have to work out whether I should stop trading if I have had 4 losers in a row. I don't want to have to decide whether to stop trading if the market is trading sideways on the day before a Fed announcement. All these decision have been made in a quiet and considered way beforehand so that when sh*t happens, and it does, I can react instead of having to work out what to do while under pressure. These days I try and save the sweating for the sauna.

If I'm finished trading for the day, I have a long to do list that will keep me and my brain busy. My work ethic is so strong I also have a hard time not doing something.  If I've followed my plan and trading is done, then I've finished my business for the day and I move onto something else. Whether it's taking care of my longer term trades, making a training video, mentoring a student, getting some exercise, doing research or just walking with my dog.  

If you feel that you need to work longer, make a daily agenda like you would if you had a 9-5, but fill the planner with things you like to do or want to do. Back testing or research if you want additional trading work or working on your hobby, or learn a new one. Have lunch with your wife or girlfriend or other friends or help your kids with their homework, volunteer, etc.  The list is endless and you will find that you will feel more energized and ready to trade the following day.  Your brain needs that switching off from trading so you can see the next day's trades with fresh eyes.

Sadly, a lot of it comes down to money. The less money you have available to trade, the more urgent you believe it is to take the next trade to make more. Sometimes working at trading less, makes more money. Taking the better trades with bigger size or staying out of the dead zone and giving profits back. Over the years, I've tested every trading scenario I could think of. The idea is to optimize your time. I remember when the S and P pit was a big deal, there were locals who only went down onto the floor for the first hour and a half and the last hour.

I wish you and yours all the best over the holidays. Be well and safe and ready for the year to come. There will be a bunch of what I hope are interesting new things to come from ElectronicLocal in 2011. Posting resumes again on January 3, 2011.