Trade Outcomes Don’t Tell The Whole Story

Posted in: Trading Article

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Being in the business of trader education and trading system development, Netpicks has seen a lot in over two decades when it comes to those looking to trade for a living.

One obvious thing to us is that that learning how to make money and develop as a trader has more to do with process than hitting on a magic formula.

It’s fantastic to find a tried and tested trading strategy such as the ones we develop, but if you don’t have the right mindset and methodical approach,  you will have issues.

You will struggle to understand the difference between something that takes a few losing trades and something that just doesn’t work. By using a trading journal, you can track specific metrics and identify their precise impact on your p/l over time.

 

Single Trade Outcomes Do Not Guarantee Success (or failure)

The problem is that when you take a loss or you get a nice winner, you’re often not in your most objective frame of mind.

The emotions that trading can draw out of you will often be strong and these can create powerful memories about what does and doesn’t work. So a few great winners or terrible losers can really make a trader decide whether or not something works.

But the logic behind this is flawed.

Conditions could be exceptional – for example, there could have been some major market moving news or there could have been execution errors impacting the outcome of the trade or simply there could be a string of reasonably expected losses.

Without recording accurate trading results over the course of a reasonable sample set, you’re relying on emotionally rooted memories of certain trades.

Learning about your strategy from decent sample of trades when you’re in an objective state of mind is a much more dependable path to follow.  That is something Netpicks has hammered home to thousands of traders over the years especially when back testing your strategy.

 

Emotional Learning Fails In Consistency

The emotional type of learning can explain to some degree why there are so many traders either jumping from system to system and also those who won’t let go of a strategy once it’s stopped working.

The “jumpers” get nervous about a system that shows a few consecutive losses or simply don’t recognize that they are making mistakes in its execution.  One thing we teach our traders is to produce 25 error free trades before considering putting real money at risk.

The “clingers” don’t refuse to believe, even in the face of the trade stats, that their strategy just isn’t that profitable any more. They remember the great winners it produced in the past and believe the next one is just around the corner.

Even worse is if they give up on it and the very next trade is a winner – this is only likely to give them renewed false hope.

Log Everything You Do – Assess Results

To properly assess your trading performance, you must focus your efforts on accurate strategy execution and logging your trades properly, rather than the outcomes themselves.

Every strategy will have losing trades, so the outcome of an individual trade should be irrelevant.

The only factor that is relevant in regards to each trade is that the trades are taken in accordance with your plan. The conclusions you are able to draw from your results are more likely to be reliable.

Additionally, if you make sure that you periodically review your results (either weekly/monthly or every 30-50 trades is a good start) rather than interpreting them as they happen, you’re going to get a much more accurate and objective picture of how good a strategy is.

If you’re going to survive as a trader for very long, it’s critically important that you learn and adapt with changing market conditions. And even the very best traders are constantly learning.

But there’s a big difference here – the best traders make every effort to learn.

  • They observe
  • They log
  • They theorize
  • They test
  • They review

They excel at interpreting the often ambiguous nature of trading results and market activity because they are diligent students. So make sure the lessons that are available to you as a trader are learnt when you are reviewing your trade log and not in the heat of battle.

 

Are You Ready For A Trading Challenge?

Trading is tough and many people think they are ready, but they are not.  They are not always ready to make the commitment and often times they’ve blown out a trading account to learn they are not ready.

I want to give you a simple challenge where I want you to see if one trades outcome influences you.

  • Does a win get you excited where you think you found your edge?
  • Did a few losses upset you enough to quit the challenge?

In our trading tips blog, there are several simple strategies you can try not for the sake of overall results (although you could do well), but try to see the effects winning and losing have on you.

Use a demo account.  Do not use real money (if ever) on what you will read.

Trading bull flags is a viable approach to trading because it takes into account a natural move in the mechanics of any market.  You can use it on any time frame that suits your schedule.

Using the 50 day moving average as part of a strategy is something that many traders look at.  It is a simple approach (complex does not equal success) and again, use the time frame that fits your schedule.

Using this keltner channel trading strategy is something that has produced good results over time.

You can even mix and match by using bull flags along with moving averages as your challenge.

Whatever you use, remember what we are trying to accomplish with this challenge.

  • Can you keep emotions out of the equation and focus on results over a basket of trades?
  • Can you do the five things successful traders do (observe, log, theorize, test, review) to learn more about the approach you are taking with the market?

This will take some time but the markets will be here waiting for you when ready.


One thing I did not mention was using price patterns as your challenge.

I put together something I call The Ultimate Guide To Price Pattern Trading that will give you more of a price structure approach to trading.

It is free and you can download by clicking the link above.

 

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