[ David C is a long-term Member of SpikeTrade. He is a money manager in Canada ]
Most weeks in recent months, I take a peek at the Spiker and Member trades at the end of the week.
Investors with less experience tend to take bigger bets, have less defined risk management plans, and tend to suffer wider losses and drawdowns.
Look at the max losses on any given week for the Member trades vs. the Spiker trades. I think you’ll see what I’m seeing.
Many investors like to swing for the fences and aim for a home run, but in reality, trading like that with real money probably means you don’t end up doing it for very long (or very seriously).
Perhaps I’m extrapolating the data set too far and you disagree.
Just my two cents. Very open to discussion on this topic!
David C
10 Comments
Zanna S.
Hi David, to work out some rules or one needs data (= experience) to base his/her rules on. No experience and no data—> no valid rules… Of cause, we may base our rules on books or rules of other traders. Even in such case we still need our own data and experience to validate rules. I believe the only way is to fail and learn and fail and learn and fail again 🙂 and the only way to become a Spiker with nice results is first to become a member with not that nice (in fact, ugly) results 🙂
Lee M.
Thank you, David, for this timely post. The topic just popped right in my inbox when I needed it the most! I only started trading in March this year. I experienced some successes the first few weeks, and then I lost it all back in just one trade. It scared me, and I stopped trading for a few weeks and restarted again in May/June.
As of last night, my gains so far are 10.5% of my equity! I keep thinking to myself: how can I manage myself better this time? How can I keep the gains and not giving them back to the market this time? One of the answers that came to my mind was to take time off, a week or so, to calm me down to prevent overtrading! I read somewhere that I need to make myself get used to the feeling of ‘deserving the money that I just made before I do any damages to it.
What do you guys think? What would you do if you’re in my shoes right now?
Thanks so much, guys.
Steve S.
It’s difficult to treat a paper- trading friendly competition in Spiketrade like a serious real money account, but that’s what is required in order to achieve a smooth equity curve steadily rising from bottom left to upper right . One invaluable money management tool I learned from a seasoned trader whose main goal is never to have a double-digit drawdown in equity, was to always keep track of portfolio % at risk when managing several positions and considering adding new entries. He will always start with risking 1-2% of account and only add more exposure on the heels of success from the initial buys. When adding more risk exposure , the total risk must be reduced whether by taking partial profits and /or raising stops to break even. By never having deep drawdowns in principal, you can let the wins take care of the rest because eventually you will catch the market periods when the gains will pile up quickly as you increase your exposure.
Steven P.
As a Beginner with a little over 1 year at Spike Trade, after gaining a sizable account(s)…I moved from 100% invested and am at 80% cash since around July 2020 when I said to myself: I have to “protect” this – this time. Anyhow, I am using the Handcuff method right now on various trade strategies. I am upping my Discipline level and will be using the heck out of the Trade Journal.
Plan: I am working on
1. 6% for Trading – 2% or less per trade (Trading for Living Guidelines)
2. 60-80% of my account in 5% sizes in RRG Sectors or Diversified Index, ETF, Mutual. – Learning about Asset Allocation….Longer term investments in the market…This is from Stock Charts Authors/Managers
3. Cash 20% – this feels wrong on how I have been investing from my past
I love having learned about Risk Management and other ideas 2% per trade, from my previous “gamble” – shoot from the hip. However I made the amount from 3 Mutual funds I created from 5 individual stocks each. Value Dividend Stocks each at 20%…However I am at the age where this type of thinking needs to be harnessed…with age comes wisdom. 61 years old
Alexander E.
David – thank you for your post. I’ve been meaning to write a post on this topic myself.
Lee – thank you for sharing the tale of your personal fairly brief journey.
I’d like to add a few comments and share a recent personal experience.
Risk management is an absolutely essential part of professional (i.e. successful) trading. Decades ago, as a fairly green beginner, I spent a week in Singapore at the apartment of Robert Rotella, an extremely hard-working and successful trader and CTA. I hardly ever saw him – he’d go to the office before I woke up and return when I was asleep. One weekend I talked him into going on a bicycle ride, and rolling under the palms asked him what percentage of his working time he spent on risk and money management. 30%. 30%?? I think in those days I spent no more than 1% of my time on that topic. Today – easily 20%.
Spikers are serious about risk because they know that if they end a quarter near the bottom of the group and with a serious drawdown, they may lose their spot. They know that we have strong Members waiting for an opening at the Spiker level – just look at Spikers Jono and Louis, our two recent upgrades and watch how they trade and control risk. It breaks my heart to see Members trading without any regard to risk, badly damaging their equity curves and their chances for a promotion…
My advice to Lee and other relatively new traders – review my Password class #25 on the “Friendly Handcuff method,” which I had developed in consultation with Kerry. I trade an account in the low seven figures, but whenever I start a new project, I still put myself into handcuffs.
Last December a good friend shared his trading method with me, and I began trading it with only a $500 risk per trade. I stayed at that ridiculously low level until I gained $5,000, and then I upped my risk to $750. Earned another $7,500 and upped my risk to $1,000. Then to $1,500, $2,000, and $2,500. Having earned $25k at the latest stage, I upped my risk to $3k in August. Now I’m starting to approach a more real size using that method.
The value of trading a tiny size, which I hated, was that it completely took my mind off of money. All I cared for was quality, in order to earn the right to step up. Had I wasted eight months? Not in the slightest, because any mistakes I made were cheap, and the education was priceless.
Trading “in handcuffs” makes one focus on risk management and trade quality – instead of swinging for the fences and losing the ball.
David C.
I agree that it can be tough to treat SpikeTrade as real given the nature of the fun contest, but if you’re serious about trading, learning about trading and gaining the skills and experience to become an expert, it’s a great opportunity.
For years, I laughed as I never set stops in SpikeTrade, being too busy with real money at the office. I of course knew that what I did at the office mattered and I certainly practice risk management there so despite the weak nature of my equity curve, I did indeed follow rules and work to minimize drawdowns.
I can tell you from experience that with real money on the line, losses are an essential part of the program. There is nothing wrong with them, they are going to happen and all you can do is control them. It’s very common to see people excuse themselves from following their exits and it gets worse, and then it’s harder and harder to sell as the loss grows and grows. It then ruins your mental capital, an account so precious yet so underappreciated by most investors.
Last night, i sat beside a friend at a baseball game and he remarked how 2021 had been so hard compared to 2020 and he didn’t understand how the indices seemed to be up, but he wasn’t. Yes, weird market, I can agree. But then he went on to tell me that he had bought two marijuana stocks, a SPAC and NKLA months ago and regretted never taking his losses. He has been spending time looking for articles and opinions about why these stocks should actually be higher. This is common and a total waste of time. Imagine spending all your time trying to rationalize why something should go up when you’re wrong. The market is right. Treat it respectfully since it doesn’t care about your own narratives.
Manage risk like a hawk. It’s easier to take a loss and buy something back then to watch a loss get bigger and bigger. The losing position will stare you in the face each day, exhausting your mental capital, robbing you of future opportunities.
Claudio D.
David-excellent that you open up this discussion. I would say that psychology plays a huge role. You can tell a trader to risk only 1% of their account on each trade, set a target and a stop. But it means nothing if they don’t honor any of those. Greed, fear, or other complex emotions kick in, and rules are out the window. It can take years of repeating the same mistakes until one gets it.
The bottom line is that you may know all the rules intellectually speaking but emotionally is a different ball game.
Lee M.
Thank you David and everyone again.
Alex, I really appreciate your reply and get me to do PC#25 again. I actually did it already, but the contents passed right through my head; I didn’t ‘get’ it until I watched it again for the 2nd time today!
At 18:18min of the PC#25, you said this: “…98% in cash…Yes, that’s exactly what I mean. Let the cash burn a hole in your pocket and the only way you can get to utilise that cash is by earning your way to utilise it. You see, in the market you can do stupid things. Nobody controls us, and only you can develop the discipline to control yourself. So let the cash burn a hole in your pocket and you know, the only way you can utilise all of the cash is by earning your way to trade it. Not just because you like it; or you’d like a shiny new car, but because you earned the right to trade it.”
Thank you Alex. The above 40 second lesson has given all the answers one needed.