Last updated on March 28th, 2020
We have all heard and probably experienced that your mind can be the deciding factor in your trading success or failure.
Some will go as far as saying that the edge you really have is yourself regardless of your trading system.
There are quite a few instances where the same method and same instructions were given to a group of people but the results were varied.
That should give you pause to think that if you have a positive expectancy trading method and are not finding success, the issue just might be you.
How you look at losing trades, winning trades and even missing trades can sometimes make the difference between long term success or failure.
Trade Plan Is The GPS
Once you believe that trading success is in large part dictated by how you think and act, you can start taking steps to address that.
That’s not to say the method is not important because it certainly is but even if you give a group of people the holy grail, most will still not be successful.
There are simple things you can do help combat the many psychological issues that arise when trading.
One extremely important one is to have faith in your trading system that in the end, after a steady stream of trades, the positive expectancy will deliver an up sloping equity curve.
To put it in a different perspective, let’s look at a driving analogy.
You know where you want to go and the GPS gives you precise directions to get there. It’s the same route you have taken many times in the past and even though you have arrived later due to traffic, you eventually meet your destination.
What if during a busy weekend you decide to venture off the proven track due to congestion and decide to wing it.
Not only that, but so sure that you knew your direction, you’ve decided to leave the GPS at home because after all, you’ve traveled it so many times before.
That’s what many traders do.
They don’t get the results they want and in their impatience, start veering off the course into uncharted water. It rarely turns out well as they drain their capital and have to leave trading in the rear view mirror.
They lose faith in their trading system and start doing things outside the scope of the tested trade plan they have been following. Some rectify this issue quickly and can salvage their capital so they can live to trade another day.
Others are not so fortunate.
Having a trading plan is a given and while most know they should have one, many don’t. That’s simply people not being prepared to treat trading as a professional career and statistics say that most traders fail.
It’s obvious why.
I want to step outside the trade plan suggestion and dig into two things you can look at that may make it easier to loosen the grip psychology has on our trading.
Missed Trades – Full Losses
You may have read that you should be definitive on your entry price and to let price come to you. For many people, they take this to mean they should use limit orders when looking to take a position in a market.
This ignores that often times getting the best price is not the most important part of your trading method.
In fact, a popular saying goes something like “You make your money in the exits”.
You also save your money with the exits because if you don’t get out of a losing trade soon enough, you will watch your account tick away to nothing.
The problem is that if you think an exact entry price is of the utmost importance and you are going to make sure you buy into an uptrend cheaply (flip for shorts), you may be adding a level of “angst” that will cause you issues in your trading.
Let’s find out how.
I am going to assume that you already have a setup that you are looking at to actually have an entry price. In the following example, I am going to look at a support and resistance trader who places limit orders for the entry at the turns.
Our trader noticed that the market was heading downwards and after price turned back to the downside, the trader marked off an area of potential resistance. Our trader calls it potential because you never truly know if it will act in that manner in the future.
The trade plan follows the “trade the trend until it bends” mantra and given the state of the market and the potential resistance, the trader lays out a sell limit order.
Price rallies but doesn’t quite hit the entry price until momentum slams price through the area that was called potential resistance. It also triggers the traders sell order and because the trader follows the standard stop placement just beyond resistance, the trade is taken as a loser.
Trading Opportunities Abound
The good thing is that this trader takes the loss as a part of doing business and quickly switches to a long side bias. Resistance turns to support is often said (although not always) so the trader places a buy limit order to take full advantage of the usual breakout – pullback market action.
Price pulls back and misses the entry price by a small margin and takes off to the upside. Our trader is patient and after seeing a topping candle, figures we could be looking at a double bottom playing out.
Once price begins a complex correction, the trader is almost sure that the buy limit will be active this time.
Price pulls up short of the A-B=C-D pullback, doesn’t hit the potential support area and then started off on a 15 point rally without this trader on board.
By attempting to get the best entry possible, this trader got hit with a double whammy:
1. On the short side, this trader was fully involved in the loss as price blew right over the entry price and through the stop price.
2. On the buy side, this trader ended up sitting on the sidelines and missing the trade while price screamed off to large 15 point rally.
The trader finally decided to alter the trade plan and use stop orders once price reached a zone of opportunity. Slippage could happen of course but because the trader only trades during times of high liquidity, barring an unusual event, slippage rarely occurs.
The other benefit was that using stop order now shows that price is attempting to head in the direction of the trade.
While this tweak does not guarantee winning trades, it does ease the challenge of dealing with being executed into a trade and promptly getting stopped out.
It also prevents you from seeing this quick loss compounded by a 15 point move that you don’t take part in because you felt entry price was key to being a winning trader.
The main drawback for people is that price is moving away from your setup area and will result in a large stop distance which ends up in smaller position sizing. It’s a trade off but for my money, its a worthy one.
Taking The $$ Out Of Wins/Losses
This trading tweak comes from the idea of hiding your P/L (although this is not the tweak) until after the session is complete.
Why is that good advice?
Seeing the ticking up and down of a dollar figure can cause havoc with your trading mind. Think about seeing your position up $500 and then down $300. The constant wave of your profit amount can cause traders to exit out of a trade because of the difficulty of dealing with that.
What is worse is when you attach something significant to a losing trade.
Imagine taking a loss of $1500 and then saying that you just lost the equivalent of your mortgage payment.
This tweak is from Van Tharp who encourages taking the dollars out of wins/losses and looking at them in terms of R (the Risk in a trade). While Van Tharp looks at this in terms of measuring the expectancy of your system, I want to look at it as keeping your sanity and to do that, let’s go back to our hypothetical trader from earlier.
Our trader knows the zone of interest and when price comes close to the area, he looks for a resumption of the previous move. In this case, once price stalls at the zone and forms a small trading range, the trader looks to sell the break as seen on the green dash line.
The stop goes above the zone with the red dotted line.
Sticking to position sizing rules of % of account, the risk on this trade is 3 points ($150) but our trader simply calls in “R”. Price pokes below the range and takes the trader short but the candle closes in what appears to be a test of the lows of the range – a failure test. This can be a sign that there is demand forming around this range which may be pointing to a move to the upside.
Our trader expects that a break of the lows of a range on the underside of a resistance zone should see a continuation lower. That didn’t happen so our trader moves the stop to just above the high of the test candle.
Price rockets through and the trader books a $75 loss.
Since the initial risk was $150, our trader actually booked a -.5R loss.
Instead of using the dollar term, our trader sticks to the R designation because he his looking at his trading business in terms of risk and not money made and lost.
Some may call it semantics but how you label something has a direct impact on how it affects you.
Think about it for a moment. Our trader was trading one contract in the ES and to be honest, saying you booked a $75 loss may not mean much especially if it is 1-2% of your capital.
What if your trading account was larger? Picture having a $100,000 trading account and you still risk 1% per trade. Your initial risk would be $1000 and -.5R is $500.
From a purely psychological standpoint, it is much easier to say you lost $75 then it is to say $500 even though they still represent the same position sizing according to your account size.
Is it a small thing?
Sure it is but it can make a world of difference to how you approach the losses that you will take.
Our trader takes a break and comes back after the first move up and sees price in the complex correction stage. Price starts to hold near the bottom of the second leg of the correction and our trader plays a breakout to the upside out of the small range that occurred.
Note about breakouts – While I personally don’t trade breakouts as a standalone method…trading them as an entry inside of another pattern is my preferred method.
Our trader is fortunate enough to ride the full 15 point move and banks a healthy $750 winner! Just saying that number gets our trader jacked up and ready for the next trade.
Then he remembers that wins and losses are about the risk multiple. He quickly changes the winner in his log book to 5R to signify he make 5 times the risk amount.
Any Edge Is An Edge
You certainly want a trading method with an edge but to leave your edge concern there is misguided. Trading is not just about the method you trade but also how you process information including your wins, losses and of course opportunity missed.
As traders, we want to make things as smooth as possible especially when we know that how we think about trading can influence our decision making process.
Not having to deal with taking a loss without the slightest move in your direction is a positive in a business where you are going to lose at times. Barring an outlier event, you may be in a position to lessen the risk if/when price does move in your direction.
Not using a dollar figure in describing wins/losses is, without question, a huge step in not being swayed by comparing the dollar figure to other financial responsibilities.
Details matter and although these are small trading tweaks, they can have a positive effect on your performance and I challenge you to put these to use for the next month. See if you don’t look at things a little differently in the end.