Resilience is an essential part of all careers. It is defined as the ability to withstand and recover quickly from difficulties. Resilience is needed significantly in day trading and investing, where losses and disappointment are common.
Historically, we have seen many investors go through periods of adversity and bounce back. For example, it is well-known that Bill Ackman lost over $5 billion when his bets on Valeant Pharmaceuticals and Herbalife imploded.
He could have given up as clients withdrew their funds. But he did the opposite and thrived. In this article, we will explain some of the top methods of developing resilience in trading.
Definition of resilience
Resilience comes from the word resilient. It is defined as the ability to withstand and bounce back from a difficult situation. For example, if you fail on something, being resilient will help you recover and thrive as soon as possible.
As a day trader, resilience is one of the vital skills that you need because of the number of trades you will need to execute every day. Scalpers execute more than 50 trades in a given day. And not all these trades will always be profitable.
Therefore, it is important to have the spirit of resilience as a day trader. Without it, you will likely give up immediately you implement a loss-making trade. Alternatively, your losses could put you in a situation of mental anguish.
Why traders need resilience
There are many reasons why you need to be a resilient trader. Let's look at some of the most popular ones are.
The market is unpredictable
First, the financial market is often extremely unpredictable. It is often not always possible to predict what will happen in the future.
For example, global stocks plunged shortly after Covid-19 was declared a pandemic and then staged one of the fastest recoveries on record.
This recovery was triggered by the relatively dovish policies by the Federal Reserve. Therefore, it is hard to predict precisely how the market will react in the future. As shown below, the Nasdaq 100 index does not always move in a straight line.
No one is 100% accurate
The second reason is that no one, including the best traders and investors, is accurate 100% of the time. As such, no matter how good you are, there will be some periods of winter. Therefore, becoming resilient will help you become a better trader even in periods of adversity.
In addition to the Bill Ackman’s example above, most traders have gone through such periods. For example, Ken Griffin’s hedge fund almost went out of business during the 2008-9 financial crisis.
But he remained resilient. And in 2022, his hedge fund made a profit of over $16 billion. If Ken Griffin can go through such a crisis, how about you?
Mental health concerns
Another reason why resiliency matters to traders is because of mental health concerns. Mental health is one of the most important things that a trader can go through.
It is not uncommon to see many traders go through a period of sustained depression. Therefore, having resilience can help you deal with these mental health concerns.
Adapting to market conditions
Further, as mentioned above, being resilient can help you adapt to different market conditions. If you are good at making money in trending markets, resilience can help you navigate ranging markets.
A good example of this is what we saw in the crypto market in 2022 when Bitcoin and most digital coins crashed by over 70%. Being a resilient trader will allow you to make money in all market conditions.
Lastly, being a resilient trader will help you avoid some popular biases in the market. Some of the top biases are recency, emotional, and primacy bias.
Recency bias is the process of considering with too much relevance events that recently happened when making a decision.
How to build resilience in day trading
Building resiliency takes time. In our experience, many experienced traders are usually more resilient than inexperienced ones. There are several tips that will help you become a resilient trader.
The most important thing in building resilience is risk management, which is defined as the process of reducing risks while maximizing returns. There are several risk management strategies that one can use in day trading, including:
- Not risking too much - You should always position your trades well, meaning that you should not risk too much money per trade.
- Stop-loss - Always have a stop-loss in all your trades. A basic stop loss or a trailing stop will stop your trades automatically when they reach a certain loss level.
- Take-profit - A take-profit will stop your trades when it hits its profit target level.
- Not over-trading - You should always avoid over-trading since it will always expose you to more risks.
Having a tested trading strategy
The other thing to consider is to always have an all-weather trading strategy that does well in all market conditions.
As you begin your trading career, you should dedicate a substantial amount of time developing a good trading strategy that meets your style and preference.
Some popular types of trading strategies ar
- Swing trading
Manage your expectations
While you want to make money, it is important for you to manage your expectations well. In most cases, you will have high expectations when starting your trading career.
Besides, you have likely heard that it is easy to double your money in the market. However, in most cases, your expectations will not be met because of how the market works.
Therefore, you should always manage your expectations well to avoid making dangerous mistakes.
Work in a team
Further, while being a solo trader is a good thing, it is much better to work as part of a team. At DTTW, we have seen many traders fail as solo individuals and then succeed when they are part of a team.
We encourage you to embrace teamwork in a bid to boost your resilience.
Finally, in addition to having a good goal and working as part of a team, we encourage you to embrace a path of learning continually.
This means that you should always work hard to learn new things about the market and about your trading strategy. Learning will help you understand how other traders deal with resiliency and how to avoid mistakes.
Key opponents to build your resiliency
There are several things that you should work hard to achieve when building your resiliency. Some of these things are:
- Losses - To build your resiliency, you need to learn how to manage your losses well. You should not let your losses cause you to make more mistakes.
- Profits - At times, making a lot of profits can cause you to damage your judgment. Therefore, you should always learn how to handle your profits well.
- Rumours - Another thing is how to fight and handle rumours in the market. One of the popular rumor-related thing in the market is known as buying the rumour and selling the news.
- Psychological and emotional traps - Further, you should work to deal with your psychological and emotional traps in the market.
In this article, we have looked at some of the most important things to watch when thinking about resiliency in the market.
As we have seen, resiliency is a crucial thing to have. And as such, you should work hard to ensure that you build it if you want to become a successful day trader.