Many times in the trading world you hear the words “you have to” or “you must” followed by some old market truism. You’ve heard them before:
You have to make sure you don’t add to losers!
You must use stops!
This is not say that I do not heed the advice of more educated and knowledgeable traders. Far from it actually, I would not be where I am today without certain mentors I followed along my trading journey… many of which helped me understand and create my trading process.
But I think that it’s important to focus on a couple things as I discuss growing as a trader: I personally feel that it’s important to focus on what it means to have winners and losers in trading. And why a disciplined trading process is a must.
Okay, let’s define what a “winning” or “losing” trade is. An inexperienced trader will often define a profitable trade as a winning trade. Obviously as traders we are in this game to make money. At the end of the day, that is really all that matters. But it isn’t truly accurate in my book.
An unprofitable trade can also be a winner. Why? Because it’s the discipline and consistency involved with following our trading process (and rules) that leads to profitability.
For each trade I make, only four outcomes exist.
1. I followed my process/rules, trade was profitable.
2. I followed my process/rules, trade was unprofitable.
3. I did not follow my process/rules, trade was unprofitable.
4. I did not follow my process/rules, trade was profitable.
First coined by Mark Douglas, it is important as a trader to think in a probabilistic mindset. In this mindset, you realize that outcomes 1 and 2 are winning trades. While you lost money in the 2nd outcome, it was a matter of probability that the trade turned out to be a loser. Realistically leaving you with nothing to learn. A successful trader only has to face the first 2 outcomes. While the 4th outcome did make you money, I would characterize that as a losing trade. Because of probability, you were rewarded for breaking your trading process/rules. This is how many amateur traders start out, while it is really a numbers game until that kind of trading will begin to deteriorate your trading account.
But to my main point, as I have been fine-tuning my probabilistic mindset, I have had many trades lately where I learn absolutely nothing. And for me this perfectly ok, this means I am stuck with the first 2 trade outcomes. With a proven edge, those 2 outcomes lead to a steady equity curve. One of my trading mentors, Assad Tannous, put it perfectly in a tweet. As you form your process/rules, you run out of dumb mistakes.
Here’s a NYs resolution for new traders. Learn from your mistakes and do NOT repeat them & eventually you will run out of mistakes to make.
— Assad Tannous (@AsennaWealth) December 18, 2015
Please don’t let this sound as if I am now impervious to trading mistakes in the future, I still have many more errors to encounter. But as I mature as a trader, I have realized that my trading is successful when I do not have anything to learn. Thanks for reading.
No position in the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.