Three Types of Trading Days That Impact Traders

I firmly believe that a trading plan is essential to success. Before you start trading with your hard-earned money, you must have a trading plan to create rules to follow in this sometimes unstructured trading career. Once you have this plan, you no longer have to think about what to do next once you enter your trade. You see the setup, take the trade, and execute your plan methodically without concern about what to do next. You become like a machine; you have taken a majority of the emotions out of your trading because everything is thought out before the initial action of taking the trade. As a professional trader following your plan, you may see more consistent profits, and that is when you begin to notice that your days are just blending. In another way, each day is a non-event. You will have days where you will make money, and then there are those where you will lose money. Your winning days will be larger than your losing days; just another day in the office—no stress or guessing when it comes time to react, just pure action. 

There will be days when you will experience sheer exuberance from making more money than you ever thought possible. And then you will have days where it will be just short of sheer terror. The other type of day is the quiet range days. And then the cycle starts over.

The keys to handling this cycle are:

• Developing the patience needed to deal with the many quiet market days 
• Developing your discipline to make sure your expectations do not get overblown on the exuberance days 
• Knowing yourself and being prepared ahead of time to deal with the inevitable bad days

Days The Market Goes Quiet

Many new traders come to the futures markets with high expectations of making excessive money daily. Understandably, the expectations of the futures markets' reputation are like the wild west with excitement, volatility, and instant wealth. And the truth is that on many days, a trader's account equity will change little. Traders who consistently use a particular strategy and adhere to stringent money management rules will find these account equity doldrums regularly as they wait for setups or the market is inactive. 

New traders are known for coming into the market, using many untested strategies, and needing more money management skills. In essence, they are just gambling. This trader will regularly see equity spikes on the positive and negative sides, which is not a good way to run a trading business. 

During these quiet times, while you're patiently waiting for a setup based on your trading plan, there may be market rallies/declines, major news events, or even the "talking heads" calling for a significant trend change. Still, as a disciplined trader, you will wait for your signal. Watching the markets fluctuate daily will make you feel like you need more opportunities as you wait. During these times of sitting on your hands and waiting for your setup, the frustration runs high, and the urge to place a trade becomes stronger and stronger. If your discipline wanes, this is known as taking a boredom trade, and I can tell you the majority of these trades will be losses. This is the market's way of pulling in the weak hands to commit their money, and then the strong hands reverse the market quickly, causing all the scared sheep to run for the exits. 

During these quiet times, you must adhere to your trading plan and not make a trade just because you have not traded recently. Patience and confidence will come from knowing that if you wait for your setup, your percentages significantly increase for having a winning trade. Confidence in your trading plan leads to having the patience to wait for your setups.

The Exuberance Days 

New traders are typically accustomed to making money by working long, hard hours for not much pay to show for their hard work. So when they have a day in the market where the skies open and drop more money into their laps than they ever thought possible, this could easily create problems for traders. Much like lottery winners who win millions of dollars and a few years later are bankrupt, if we are not mentally prepared to handle windfalls of fortune, we will be destined to give it all or, worse, even more back. 

Once you have a significant win, you become seduced into thinking this is easy money. Suddenly, you are thinking about annualized returns based on this one trade. Perhaps you are saying, "If I do this three times per week and trade 50 weeks per year, I will have xx billion dollars by year-end!" Can you see the dangers here? Anybody who trades regularly knows that these windfall trading days don't come along all that often, and then in between them, we have this thing called "equity drawdowns." Hopefully, our new trader here does not go out and start living the lifestyle of this billion-dollar trader. 

These are the kinds of days that lead to inflated expectations of future earnings in the markets. The euphoria created these days can lead to an addiction to this fast, easy-money fantasy. You may start to ignore your trading plan, trying to keep this adrenaline rush alive. The first thing that starts to happen is that you begin to take on much more risk than your plan calls for, and it subsequently self-destructs because it was not designed to trade this much risk. 

Next, you need to be more careful in selecting your trades. When your account is small, you are very particular about your trade selection simply because you don't have much financial room to be wrong. As a new trader, I recommend only keeping enough funds in your account to meet margins and have some extra for losses. Otherwise, I would transfer the excess funds to an interest-bearing account that is easily accessible for wire transfers in case you need the funds. You can quickly become careless when you have this extra "free easy money" in your account. One other event that tends to happen when you have excess funds in your account is that you tend to let your losses run further than you may have in the past. 

All that said, we are all humans, and we will let our emotions into our daily lives. Theoretically, it would help if you did not let emotions interfere with your trading. Therefore, you should not let making money get you all that excited, nor should losing your money be demoralizing. Again, the key is being prepared for how you will handle these events and have great discipline. Treat each day the same and keep your emotions on a plateau. 

Trading plans should have a section covering how you will handle these windfall profits. If you receive this windfall and are still in the position, your strategy should outline the process right to the end of the trade. How often have you experienced greed, not exiting a windfall profit trade, and seeing the whole transaction become a loser? Your discipline will be the key to handling these windfall trading days. As I said, we are all humans and will have emotions. The key is not letting this particular day impact your future trading sessions.

The Inevitable Bad Trading Days 

After reading that last section, you probably did not think lousy trading days come along, did you? 

Guess what? 

They do and are just as dangerous if ignored or you are not prepared to handle them. How we take these days separates us from the losing traders. 

Losing trading days may come in a series or perhaps a single trade that gets away from us due to a morning gap or significant news event, but regardless, you can expect to see these days throughout your trading career. Once you accept that you will have these bad days, you must be prepared to keep your bad days from turning into catastrophic ones. 

Remember, there is a big difference between a bad and a catastrophic day. I remember Alan Greenspan's speech, regarding the dot com stock market bubble, about over-exuberance when he was trying to slow down the economy, and his analogy about our economy growing too fast. "If the market is going to crash, I would rather see it crash at 55 mph than 120 mph." Just like a bad day in the market (55 mph) and a catastrophe (120 mph), at least you have a "chance" of walking away from the 55 mph crash. We want to make sure we can come back and trade tomorrow. A horrible feeling is blowing out your trading account and having to go out and get a real "JOB" to raise equity to return and trade. Remember, a catastrophic event leaves you both financially and emotionally ruined. "If" you come back to trade, you will always have that fear of losing in the back of your head, which can lead to future problems of pulling the trigger to initiate a trade. Hesitation can lead to being notoriously late entering your trades. 

Remember that most new traders come into the business with very high expectations of success and pay little attention to the risk, chances, or residual effects of bad days. The antidote to dealing with these bad days is to be prepared for them. Two crucial elements to consider for being prepared is proper money management and having realistic expectations. 

When I was day trading, I employed a money management/risk technique called a circuit breaker. I would have a maximum loss per trading session built into my trading plan. I would leave the office if I hit this dollar loss amount during the session, eliminating the urge to revenge trade. I found that if I lost money in the morning session and came back in the afternoon thinking I would make it back, I lost even more for the day. A trader should expect these types of losing days. 

One strategy does not work in every market environment - you may be distracted by something unrelated to the markets, you may not feel well, or any other host of events can cause you not to be in sync with the market that day. Stop throwing your money away and walk away from your desk, allowing you to come back another day and trade. You will be amazed at how much better you feel about yourself when you have the discipline to walk away from these days. It works, trust me.

For more information on the mental side of trading, you may find a recent article, "Trading Pressure Can Impact a Trader's Performance," helpful on your journey to becoming a successful trader.  

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