We want to make money in trading. Sounds like an obvious statement and it is but having that as your first goal is not something you want to do.
Trading goals are vital just as setting goals in anything can help you attain them with a proper plan but you should know if the goal is the problem.
Here is a typical conversation with a trader who is having trading success but has not reached the success level that they have aimed for:
Why do you trade?
To make money?
What’s your goal for the next trade you take?
To make money?
And that is a problem. It’s a problem that could be standing in front of your ultimate goal so we need to get that fixed.
A Goal You Can’t Control
Obviously the object of the overall game for traders is to make money, but the trouble is that if the goal of your next trade is to make money, you’ll have a great deal of disappointing outcomes – and that can be really tough if you’re not already consistently profitable. Trading by its very nature is a game of probabilities.
Wins and losses come in a random distribution so setting the goal of making money on the next trade can lead to a host of psychological problems related to trading. You can take a fantastically profitable trading system and it will have some losing trades no matter what you do.
By approaching individual trades with an objective of making money or even ‘winning’, you’re setting yourself up to lose before you even start. Although it may seem like semantics to some, it’s these sorts of psychological subtleties that can make all the difference to a trader’s level of performance.
What comes next when the goal doesn’t materialize during a losing streak? Your trading performance takes a beating.
- Revenge trading
- Increased position sizing thereby increasing the risk you are putting on an individual trade
- Not taking your stop hoping that trade will come back and fulfill your goal.
I don’t think anybody can dispute that those three issues can put you on the fast track to a blown out trading account.
Need To Pay The Bills
You could have the “need to make money” mindset for several reasons. You might need the income to support you and your family or you might have psychological ties to money as a measurement of success. But whatever the reasons are, the money aspect often brings baggage to the table that just isn’t helpful to your trading.
In trying to make or avoid losing money, you might take your profits too early or hold onto losing trades for too long. And if you think you must make money on every trade, you’ll wait until you’re convinced that the trade you decide to take will be a winner, only to find it all the more difficult and painful to take a loss when the market moves against you.
In the meantime you’ll end up missing out on a whole bunch of great opportunities in between which will lead to taking trades outside your plan to make up for the missed ones.
This is not a hamster wheel you want to be running on.
It’s About Probabilities
Do you really believe that any trading strategy is going to win 100% of the time? No, of course you don’t.
We’ve already established that trading is a game of probabilities. Does Roger Federer expect to win every point he plays?
Of course he doesn’t.
Does he try his hardest to win every point by playing the right shot at the right time?
You bet he does.
Does he let each point that he does lose, mortally wound him?
What makes him a winner is his ability to execute a winning strategy over and over again without the fear of losing. Just as great tennis is a series of shots played in the right way with the context of the player in front of you, great trading is a series of trades taken in the right way with the context of the current market conditions.
Some shots are winners, some are losers. Some trades are winners, some are losers.
You should know through the extensive back testing you’ve done (?) that you will experience multiple losing trades in a row. You already know the truth: a goal of making money on the next trade is a bad idea. You’re back testing has shown that will never happen in a consistent manner.
Make Playing The Trading Strategy Your Goal
The crucial point here is that you must know how to mentally take your inevitable losers in order that
- The losses don’t become bigger than they should be
- Losing trades don’t bring you down and affect your subsequent trades.
If you were to sit down and analyze the cost of not executing your plan as it’s defined, you’d likely see just how expensive these mistakes can be. So instead of setting out on each trade to make money or to win, what I always say is you must set out to execute a predefined winning strategy to the best of your ability.
Successful traders long figured out the for any lasting success, You must trade to trade well.
This way, it doesn’t matter what the outcome of the trade is; it matters whether or not you traded your plan properly.
No self-sabotage, no beating yourself up about that would be winning trade that you didn’t pull off because you were making it up as you go along.
It’s purely and simply about whether you execute your trade plan properly; win, lose or scratch.
Never underestimate the power of execution when it comes to trading.
- It’s why some football teams that lack superstars can compete with stacked teams.
- It’s why Federer has been a top performer for such a long time.
This business is no different in that those who are successful are those who are able to effectively execute their plan. So you wanna make some money? Then make your goal for your next trade to execute your plan properly and allow the odds to eventually roll in your favor.
Sometimes Money Clouds Your Judgement
There will be time that the losses keep coming and you are losing more money than you are making. You are continually executing the plan and not having your overall trading goals attached to the next trade. Even the most mentally strong, even the professional trader who interacts with the market with accounts under management, will begin to feel the pressure of the losers.
What do you do?
There are times when you have to shut down and walk away from the session. We are human and no matter how much we try, we all can fall victim to human emotions and frustrations.
- If your goal is to make money, you have little control over that and those frustrations can be tough to handle.
- If your goal is perfect execution of your proven trading plan and you are beginning to stumble, that is something you can control.
What can help you can be found in this article: 3 Principles Of Mindfulness Trading
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