It is interesting to see how individual traders approach this business. Of course there are different methods and ways to trade but I am talking about the mindset. I think that is the number one criteria that can predict the ultimate success or failure of a trader.
When I first started trading, I did hear that psychology plays almost 90% in your success. Where that number came from, I don’t know, but at the very least it does highlight the amount of attention you should pay to it.
A recent email chat with a new trader made me realize how far I have personally come in my trading philosophy and psychology. We were talking about a trading loss that I had and she was surprised I was taking it in stride. I told her that even though there was no profit booked, it was still a positive outcome. “What is so positive about a trading loss?” she asked. I replied that it was the type of loss that I took that made it a positive outcome.
I can imagine many reading this are thinking I am crazy, but let me explain.
When we trade, most (I hope) have a trade plan. Those two words “trade plan” together mean “planning your trade.” Inside of planning, you plan the setup you are looking for, where you will get in and where you will get out. One major part of all of that is where you will get out and how much of your account you risked during that ride to your exit. I am assuming all of you understand position sizing and risk a percentage where you can absorb a string of trading losses.
You have two exits, your profit and your protective stop. We never know which trade is going to be a winner. Sure, we anticipate the entry and would like a winner but in the end, it all depends on the market and the bias of other traders. Don’t go in with the expectation of a win… but an expectation of a positive outcome. Since I have planned to risk an amount that has me far removed from the risk of ruin, a loss is not such an adverse event. Where it does become adverse… to the extreme… is if I allow price to exceed my planned exit if I am about to take a loss.
See, I expect to lose. I also expect when I lose, to lose a predetermined percentage of my available risk capital. Adhering to the predetermined exit price in the case of loss leaves me an account that is still ready to take another trade. The fact that losses are just a part of trading as a win makes me believe that a loss on my terms is a positive outcome. I adhered to my plan that will allow me to “fight another day” (not that I see trading as a battle – but you get the point). It gives me the confidence to take trade after trade knowing that I have the capacity to adhere to an exit price that is suitable to account sustainability.
The negative outcome is letting fear and hope take over and taking a loss much bigger than I had planned. That is the habit of those that are destined to ruin their account.
Change your thinking to accept a trading loss on your terms as a positive outcome. I bet that you will have an easier time in booking those losses and moving on to the next trade without feeling gun-shy. The trader I chatted with? She taped up the sentence “Losses according to my plan is a positive outcome.” She says it allows her to trade with a certain calmness. I wish that for you.