Have you ever gotten so hung up on a winning or losing position that you lost sight of your overall profitability? Here are four tactics that can help improve your performance—regardless of how any single position may fare.
1. Set reasonable expectations
You don’t have to be right all the time to be profitable; in fact, you don’t need to be right even half the time. The trick is to set—and sustain—a reasonable “expectancy” of profits versus losses. For example, I’m generally looking for a profitability ratio of 3 to 1, or $3 in profits for every $1 in losses. That way, even if I get only four out of every 10 trades right, I’ll still be in the black (see “A winning strategy,” below).
I recommend using a profitability tracking tool—such as the Gain/Loss Analyzer available to Schwab Trading Services clients (see “You win some, you lose some,” below)—to determine whether you’re on the right side of your expectancy. If you find your profitability ratio falling short of your goal, it may be time to…
2. Analyze your losses
Start by taking a hard look at your losers. Did you sustain losses across the board or did just a handful of especially bad trades sink your performance?
For me, the biggest barrier to success is overconfidence. For example, I nearly always set a stop-loss order when adding a new position. However, on more than one occasion I’ve gone back and removed it, convinced the declining stocks would bounce back. They rarely did, of course, and my losses worsened exponentially as a result.
If, like me, you sometimes have trouble sticking to your trading plan, it can help to remember that successful trading is as much about preserving money as making it. After all, if you don’t maintain the capital you have, how are you going to turn a profit down the road?
3. Examine your winners
Study your winning trades, as well, including how the stocks performed after you sold your positions. Painful as it is to acknowledge, every trader inevitably leaves at least some gains on the table.
Indeed, one common habit among traders is to sell as soon as they’ve seen the move they expected. But one of the surest ways to meet or even exceed your expectancy is to hold the stocks you like as long as you can. To do so, try selling half a winning position at your target price and setting a new stop order for the remaining half. This can help you lock in the profit on both halves of your position while also giving yourself more room to run.
4. Review regularly
How often you should review your overall performance depends on your trading frequency. If you make fewer than five trades per month, for example, a monthly or quarterly review should be sufficient. If you’re trading every day, on the other hand, you should check in more often. I typically make 15 to 20 trades a month and review my performance weekly.
The important thing is to make it a regular habit. Consistency and discipline are the hallmarks of successful traders. You don’t develop these traits through happenstance but rather by carefully studying your own strengths and weaknesses.
Kevin Horner is a senior manager of trading services education at Schwab Trading Services.