One Truth In Trading To Not Forget

Posted in: Basic Trading Strategies, Trading Article

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There is one trading book we recommend for every trader and that one is “Trading In The Zone” by Mark Douglas.  While there are trading books on trading techniques and money management, Trading In The Zone focuses more on the mindset of a successful trader.

One section of the book is called Fundamental Truths of Trading and there are 5 “truths” that Douglas writes about:

  1. Anything can happen
  2. You don’t need to know what is going to happen next to make money
  3. There is a random distribution between wins and losses for any given set of
    variables that define an edge
  4. An edge is nothing more than an indication of a higher probability of one thing
    happening over another
  5. Every moment in the market is unique

When one of our traders in our trading room or that have purchased one of our trading systems is having an issue with a string of losses, we always point them to #3.

In the end, all of those “Truths” circle back to:  Anything Can Happen.

Netpicks Inner Circle

 

You Don’t Trade In A Bubble

Markets move by the fulfillment of orders and the direction of the market depends on the majority bias. If the people holding the bulk of the orders in terms of size have a bias of long, that is where the price will head.

Try to get rid of the term “market” when talking about movement or control and actually put the proper name….Traders….in its place. It is a small thing but reminds you constantly that there are actual people on the other side of your screen.  Yes, there are algorithms that trade but they were programmed by humans.

Anything can happen is truth and it is truth regardless of the edge you may have in the market.

The only thing we can control is where to get in and out of the market with some degree of accuracy. Price will continue to move in either direction long after we exit.  Thinking you can control much else is ignoring the fact that you don’t trade in a solitary universe.  There are others with the same and opposite views that you hold.

Ever taken your exit and watched price continue for many points/pips in your initial direction? How did you feel? I used to beat myself up as I calculated missed profits until I really grasped that anything can happen.

On the flip side of seeing the market continue……..

What about when you took your exit and then price reversed and would have taken back the profit? Feel better? The thing is…they are the same thing and fall under the umbrella of “anything can happen”.

The best we can all do is trade the plan for the particular trade and be satisfied with the outcome. Perhaps even better is to have a plan on either extending your trade via trailing stops or have a reentry plan to get back on-board the continuation of the move. Of course, that all depends on you and your testing of each scenario.

 

Your Testing Makes Things Easier

The problem that most traders have is they haven’t grasped the concept of “anything can happen”.   They panic when there trading method is not producing the wins they believe it should.

Why do they panic?

Traders that don’t prove to themselves that they are actually trading an edge  (#4) have no idea what a “normal” distribution of wins and losses look like.  They have not shown themselves that their method, even though it has an edge, can go through losing streaks of 3-4 and sometimes 10 trades in a row.

Knowing what to expect from your trading strategy will allow you to better accept that anything can truly happen when you are trading.  Your losses simply become part of the random distribution of wins/losses and knowing the expectancy of your trading system allows you to approach your trading with a sense of calm and acceptance.

A great tip is to paste the saying “Anything Can Happen” over top of your trading computer.  Believe me, knowing and accepting this truth can improve your trading as long as you continue to stick to your trading plan.

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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