674
by charli
Just some nice read and wisdom from trader Oldtraderman
"It's All In Your Head
Trading presents a rather interesting set of circumstances for us to operate in: it is inherently uncertain - nobody knows for sure what is going to happen next - and it involves a high degree of randomness/unpredictability that means even the most thorough analysis is going to be proved wrong over and over again. This combination is what makes trading difficult and very taxing intellectually and emotionally. You do your best to figure it all out carefully and - Oh dear! - wrong again.
It means you have to accept a lot of losing trades as a matter of course and we are simply not geared up mentally to deal with that well. Going back to basics, instinctive survival means not being wrong too often or you will end up as some wild animal's lunch. Moving forward a few millennia and being wrong too often will mean you are looking for a new job. We are hardwired to avoid being wrong, but being wrong is an inherent part of trading. Quite the mental conflict for us to deal with.
The trading solution to this is deceptively simple: accept you will be often wrong, and have the discipline of a small position size + rigid stop loss always in place so when you do lose you don't lose much. Look at trading as a series of trades that faithfully follow an underlying strategy that will result in a pretty random series of winners and losers. If your strategy has any edge and your discipline is good you will come out on top over the entire series.
Of course, if either your strategy has no edge, or your discipline is poor, you are likely to be a net loser.
Markets are inherently unpredictable and incorporate a high degree of randomness. This means any strategy is at best likely only to have a small edge - something that makes it better than random. But an edge you must have or there can be no expectation of generating a net profit over time. But what makes an edge for you, exactly?
Essentially, it can come in only one of two ways. For a 1:1 risk: reward profile either: your win rate is better than 50%; and/or the average size of your winners is bigger than your average for losers. Of course, if your R:R is better than 1:1 then this reduces the win rate burden - at 1:2 (winners 2x losers) you only need a win rate better than 33% to be net profitable, for example.
Whatever strategy you use - and it doesn't really matter what it is as long as it suits your psyche and beliefs about the market - it must have at least one of these two positive edge attributes. Otherwise, you are just wasting your time, effort and money. So backtest, demo trade and small-size trade your strategy to death to prove it has a durable edge, and instill in you the internal confidence to keep going with it through inevitable and frequent losing patches.
Different strategies ask different things of a trader. Short term, high frequency, trading makes rather different demands on you than low frequency long term trend following. You will not profitably trade even a very high edge strategy if you are not comfortable with it. You are far better off trading a lower edge strategy that suits you than a higher edge one that doesn't. My basic method I know is sub-optimal, there is a better way to trade it. But I don't because the sub-optimal way suits me much more so I accept watching the bigger potential profits remain on the table. I'd rather sleep well than increase my edge. Each to their own"
