"Murder Your Darlings." A Trader's Motto
Ruthless Advice if You Want to Succeed at Trading
If you want to succeed at trading you have to be willing, and able, to murder your darlings. Of all the trading sins, not murdering your darlings is one of the worst.
"Darlings" in this case refers to your losing trades or those trades that could turn into losers. The "Murder your darlings" quote is attributed to Arthur Quiller-Couch, to spur writers and authors to cut redundant or useless sentences from their work. Intended for writers, it is apt for traders.
Why Murdering Your Darlings is Important
If you day trade for any length of time you'll find that some trades go your way, and some go against you. No matter what you do, no matter how good you get, some trades will do something very different than what you expect. To have any hope at making a profit over the course of the day, week, month or year you need to stop those losing trades from erasing what the winning trades give you.
Day traders will often have a few winnings trades in a day. But if they let one loss get out of hand, it can erase the whole day of profits (and more). Cut the loss, here's how.
Planning the Murder
Always approach trading with a plan. Your losing trades need to be axed, so plan the various ways to do it. The simplest way to "murder" a losing trade is to have a stop loss order attached to it. The stop loss is set at the outset of the trade, and it serves to cap the risk on the trade.
Ideally, send out a stop loss order with every trade you take. Platforms like NinjaTrader or MetaTrader make it easy with a few tweaks, so there is no excuse not to have one...if you opt to use a fixed stop loss.
Other options for murdering a bad trade include "active trade management." Active trade management is where you continually analyze the market situation while in a trade. Ideally, a stop loss should still be set, as it acts as a last resort to get you out of the trade if you fail to manually exit the trade before that price is reached.
With active trade management, you still plan how you will exit the trade. Strategize what you will do if various circumstances develop. Remember, not all trades will work out as we expect, so consider the possibilities; hatch a plan and then exit according to your plan and what the market does.
There are a number of tricky situations which often require you murder a trade, but many traders don't.
- You have already let the loss get too big. This is the worst. Because you already let the loss get bigger than it should be, there is a desire to wait for it to come back in your favor before getting out. Get out, you shouldn't be in it anyway. If the trade/asset isn't moving much, set a stop loss on it to make sure you get out if it starts moving against you again. Once you are out you will feel better, and can start looking for new opportunities (take a break after a big loss).
- For many traders, a stop loss means they can be lazy. If conditions turn unfavorable, they hope their trade will still work out, and if it doesn't they reason that their stop loss is there to protect them. That is true, but if you know that you are highly likely to be stopped out on a trade, why let it hit your stop loss? If the trade is a winner and conditions start to turn, take the profit, don't let it hit your stop loss. Note: this is a more advanced trading concept. If you are just starting out it is usually best to just let the price hit your stop loss or profit target. As you analysis skills improve only then consider exiting a trade early (see New Day Traders, Here are Your First Three Goals).
- Whether you are using a fixed profit target, or just have one in mind, one of the great sins in trading is letting the price hit your stop loss (for a full loss) when the price had almost reached your profit target. In day trading the price moves quickly and getting one chance is often all you get. If the price gets close to your profit target, consider that a win. Hold it if it keeps moving toward the target, but if it shows signs of slowing down or reversing, exit immediately and take the profit. Don't let an almost full winner turn into a full loser.
Summary on Murdering Your Darlings
Have a plan for exactly how will exit a trade in various circumstances. Having a stop loss is one recommended step, but you can do more. Realize the market is constantly changing, and the best traders have the adaptability to change with it. Faced with a big loss? Murder it. Big winner is starting to move against you? Murder it; take the profit. Always have a plan, and that will keep you somewhat distanced and unemotional about trades. If you have an emotional attachment to a trade, murder it, and don't trade it again until that attachment is gone.
For more on this topic see Trying to Avoid Losing Trades is Actually a Huge Mistake.