Dollar counting is a sin usually committed by traders. As soon as these traders luck into a small gain, their fear of losing it cause their eyes to bulge, their hands to twitch, and their breath to quicken. In some cases, the losses starts to burn a hole in their pockets, until the urge to cut the trade short completely consumes them.
The goal and focus of every trader is profits. Entertainment, action, the thrill of victory, even the agony of defeat can be attractive and very enticing lures. But it is the potential to dramatically increase one’s wealth that wets the palate and lights the fire of most market players. In short, it is making money that is driving force behind the desire to trade and invest. But while profitability is, and certainly should be, the primary objective a trader must work on is to forget their profits. Let me explain.
Constantly monitoring how a trade is up or down is a destructive activity that has been robbing traders of big profits in this game. This process, commonly referred to as Dollar Counting, not only increases fear, it also promotes moment to moment uncertainty and prevents one from focusing on proper technique. And it is proper technique that ultimately determines how profitable we become.
How many times has the fear of giving back a tiny profit knocked you out of a position just before it went on to score big price gains? How many times has the paralysing effect of a loss prevented you from cutting a stock loss precisely when you should have? The fact is, focusing too much on where you are, at the expense of what you’re supposed to be doing leads to knee-jerk reactions and responses that lack objectivity. Instead, traders must make sure that their techniques are sound at every step; and if that is done properly, the profits will take care of themselves.
“Am I entering the trade at the right place?” “Is my stop loss properly set?” “Did I size my position according to my risk appetite ?” “What is my price objective and what course of action will I take once it’s met?” These are the questions that traders should perpetually ask themselves. Your action should be dictated by a well-thought out trading plan, not by the minute to minute changes in your account p&l.
How to Eliminate the Sin of Dollar Counting
We teach our traders to focus on their technique, not their profits or losses. Traders should be taught to let their well executed strategies take them out of their trades. Consider the following steps:
1. For each trade, establish two potential exit prices, at which you will sell your entire position
The first of these sell points should be a stop loss level. The second will be your target level where you expect the price to go and serve as your price objective. Each trade you take should always have one entry point, and two exit points. The stop loss is used for protection. It is a safety net to kept your losses within your risk appetite based on the initial position of the entry and stop loss plan.
2. Sell only if the stock you are in violates the stop loss level, or hits your objective.
By adhering to this rule, traders place the fate of each trade in the hand of their trading strategy, not in the hands of their greed or fear.
3. If the urge to exit before the exit levels is met becomes overbearing, satisfy the urge by selling only half and letting the remaining half sit until the strategy says exit.
Say you already have a $400 gain you can lock in now is starting to look too delicious to ignore. While you recognize that $800 would be better, your dollar counting is preventing you from thinking straight and fear that the $400 gain may evaporate is creating a powerful urge to take the money and run. You can sell halve the sizes, locking in a gain of $200, while giving the remaining shares/contracts a chance to go the entire distance. By doing this, you satisfy the urge to sell, while retaining the integrity of your trading strategy.
These three steps will help you weaken, if not completely eliminate, the deadly sin called dollar counting.