Today's Quote: “Nobody trips over mountains. It is the small pebble that causes you to stumble. Pass all the pebbles in your path and you will find you have crossed the mountain.” Anon

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

HOW TO FIND AND KILL YOUR DEADLIEST DEMON (Part Two)

The Setup

Before you begin differentiating the "good" losses from the "bad" ones, it is necessary to organize a section of your trading journal in a way that will make it easy to keep track of your progress. The following three steps will help you do just that:

1. Take a page in your [trading journal] and divide it into two columns.

2. Title the left column: "You Can't Win Them All."

3. Title the right column "Kill These or Be Killed." We're sure you get the point.

Now you are ready to start the all-important "separating" process. We call this activity, "separating the good losses from the bad losses."

Separating the Good Losses from the Bad Losses

1. Thoroughly review the individual components of each losing trade: the entry, the trade management, that is, the initial stop placement and the trailing stop method, the exit, etc.

2. If, after the review, you decide that no errors were committed, list it as one of those "you can't win them all" trades, and move on to the next trade. These "no-fault" trades can be largely ignored at this point.

3. If, after the review, you decide that an avoidable error was made, list it in the "kill these or be killed" column under a subcategory named for the error. This is done to help you differentiate one error from another. A few examples of such subcategories might be: "entered too late," "exited too soon," "ignored the stop," etc. As you know, we have detailed a similar process in Chapter 6 of this book.

Finding and Killing the Head Demon in Charge of Your Demise

After a series of losing trades, you will find that one subcategory of errors begins to outpace the others. Once you have detected this, you have found the head demon in charge of your demise. And you must immediately set out to kill it, mercilessly. Your sole purpose in life at this point will be to entirely eradicate this frequently committed error from your existence. Whatever the cost, whatever the effort, you must vigilantly put an end to this error. If the error is "ignored the stop," then you must set out to adhere to your stops. If that means selling early, then do it. Sell early. But whatever you do, don't let another trade go beyond your predetermined stop, ever. Promise yourself that over the ensuing days, weeks, or months, the column titled "ignored the stop" will have the smallest number of entries.

Once this subsection of errors has become the least of your problems, start working on the next category that stands out as the biggest problem. Agree to continue this process for life, and eventually your biggest problem will not be deciding which demon to kill, but finding demons to kill, period!