The Best Method to Trade

Let us begin with random trading or revenge trading or over-trading. Usually, this is triggered by indiscipline and lack of faith in the trading system.

Why the lack of faith happens? It could be on account of:

1. Lack of proper backtesting and/or
2. The trading system is not in sync with your trading personality

So, ask yourself which of these two factors are affecting you. Mostly, it would be a combination of these factors.

If it is not either or both factors listed above, it then means you are not disciplined as a person. Remember you carry your basic personality into trading too. Meaning, if you are normally a personal who is not too disciplined or patient, you cannot magically implement those characteristics in trading.

We are not split personalities to behave in a different way across different activities. So, try to practice being patient and disciplined in all activities you do outside of trading. Maintain a to-do list and ensure you complete those activities for the day. This will slowly get reflected in trading too.
 

FEAR OF LOSING TRADES

Let us now shift our focus to the second problem. A lot of us have his fear or hesitation to take the next trade for the fear of that trade turning to be a losing one. This happens especially when you have already encountered a series of losing trades.

If this is the scenario, it means you have not understood the basics of trading. Go back to the prior newsletters and read about expectancy & win-ratio. Irrespective of what time frame you trade and what type of trader you are, losing trades are inevitable.

Losing trades are a function of the win-ratio or success ratio of your system. The bigger the win-ratio, the smaller the string of losing trades that is likely to happen and vice-versa. You will have to mentally reconcile to the fact that losing trades are unavoidable and it depends on the win-ratio of your system.

Think about next 100 or 200 trades and do not worry about the outcome of the current or the next trade. It is important to realize that the outcome(s) of the recent trade has no impact on the outcome of the current or next few trades. So, if you have 10-losing trades in a row, there is no guarantee or requirement that the eleventh trade will also be a losing trade. It could be either.

The probability is still dependent on the win-ratio of your system. Realize that you CANNOT predict the sequence of winning and losing trades. So, just stick to your system and let the law of large numbers play out. If you are not sure, do a google search on the law of large numbers.

The other important psychological factor is the basic human urge to be correct. We do not want to be proven wrong. Just ask yourself if you wanted to, or like to see the price going down when your stop-loss in a long trade is triggered?

I presume, everyone wants this to happen. If so, what is triggering this thought?

This is triggered by our urge to be correct. When a stop loss is triggered, we associate it with our self-image and think that we are proven wrong by the market. Hence, we wish to see the price going further down after stop loss is triggered. This will make us feel good about the stop loss placement.

If you can relate to this, it basically means you must reorient your thought process. Again, remove the focus from the outcome of the trade. It does not matter. A stop being triggered is a common occurrence and just move along. Do not overthink it and let it not affect you psychologically.

You can reach this state of mind only when you have a thoroughly backtested system and more importantly a system that suits your personality and style. I cannot emphasize this