Lessons from the Pros

Education Resource

The Benefits of Evidence Based Trading

How many times have you been convinced that something was going to happen, like a particular outcome in a trade, and then it didn’t happen?  In other words, you had invested deeply in an outcome and that outcome never materialized…go figure. It is likely that as you evaluated the mechanical vs. the internal data or information that you entered into your trade log and thought journal, you realized that it held little evidence that those original convictions and certainties regarding the outcome made sense. The point is that unless you have evidence that those convictions or certainties are accurate, then you are setting yourself up for being duped. You are chasing rainbows of the trade and, just as with real rainbows, neither now or ever in the past were there pots of gold at the end; it is a natural occurring illusion. The important thing to remember is that it always has been and always will be a naturally occurring illusion and anyone who believes that there is a pot-o-gold at the end is engaging in a delusion (believing something exists when it doesn’t).

Believing in things that don’t make sense and are not true is nothing new to trading. In fact, it is so common that it’s fairly accurate to say that roughly 95% of traders have at least one if not many limiting, irrational or negative beliefs that initiate emotions like fear, greed, anger and anxiety which then drive a behavior or, more importantly, a rule violation designed to reduce the errant emotion.  As you can see, or more to the point, as you have probably experienced, many of these trade related variables are quite difficult if not impossible to control, but the good thing is that they can be managed…to a degree.  When you think about it, the act of trading is the manipulation of either accurate or inaccurate information in pursuit of an outcome that closely reflects your desired trade result.  So, the critical behavioral choice is to be consistent in how you do what you do; that is, your process.

Woman looking at a piece of paper with a magnifying glass

What exactly are those pieces of evidence that create a high probability trade? Some of the more serious elements are the short, intermediate and long-term trend; what and where are the significant supply and demand zones; where on the curve is the trade that you are evaluating; and, the time frame which reflects the strongest move.  When all of the variables come together it’s a thing of beauty and the caretaking of the plan either supports all variables pointing to an outcome…or not.

Free Trading WorkshopAdditionally, there is another part of the trade process that heavily impacts upon your relationship to the trade, for example, documenting what was done and when is essential to effective trading.  Documenting both the mechanics of the trade (evaluations, entries, exits, targets, stop-loss, economic reports and news) and your internal data (thoughts, feelings, emotions and the behaviors initiated in response to those thoughts and emotions) could provide over time an honest and fairly accurate picture of your process in action and whether you adhered to the plan, the rules and your personal commitments…or not. This critically valuable information could reveal the effective or ineffective patterns of thinking, feeling and doing that come together to create an outcome.  Herein lies the evidence that could either support a particular trade choice as being high probability, or not.  This is a major step that, done consistently, could afford the ability to compare notes on violations with the aim of detecting bad patterns of thinking, feeling and doing.  At this juncture the evidence, if objectively viewed, could guide and inform your thinking and your choices; especially evidence that reflects at least several weeks if not months of trade data.

This is a process of engaging the system and uncovering information needed to effectively resolve trade issues like moving stops, chasing trades, exiting prematurely, etc.  Using a journal to track and evaluate your limiting beliefs, thoughts and emotions could over time provide you with these data.  Additionally, ask your unconscious questions like: What must I do differently to deal with this issue? Also: What can I do to change this limiting belief? In this way, you could recruit the power of the unconscious and identify critical behaviors and take crucial action to begin to change the limiting beliefs that were the original culprits.  Writing down and analyzing those internal data could be critical to meeting your trading goals.  You could use the evidence to name it in order to tame it. This is what we teach in the Mastering the Mental Game online and on-location course.  Ask your Online Trading Academy representative for more information.  Also, get my book From Pain to Profit: Secrets of the Peak Performance Trader.

Joyous Trading

 


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.