Lessons from the Pros

Specialty Skills

Detach from the Trade Outcome to get the Desired Results

It may sound like a contradiction, but the best way to get where you want to go in the trade – meaning profit – is to stop focusing on it.  In other words, the outcome of P/L is not important.  The element that is critically important is your process; that is, the flawless execution and implementation of strategy and plan; your edge.

Take a moment to think about what happens when you initiate planning and implementation of a trade; for instance, checking economic reports and broad markets, setting the curve, finding and drawing the zones, checking the trend, scoring the trade with odds enhancers, determining S.E.T.S. (stop, entry, target, size), placing the order, managing the trade, monitoring reports that might impact the price movement, and logging the trade after it is closed.  Now, what part of this process focuses on profit? None of it does; except of course identifying your profit target to establish reward/risk parameters, which is very important.  Otherwise, the potential profit is not relevant to the process; but the novice focuses on and emotionally invests in it.

Consider how the novice feels when the trade does not end in their favor; they feel emotionally betrayed, angry, sad and, in many cases, vengeful as well.  Now, what is this reminiscent of… relationships?  When you get into a relationship and it falls apart, generally speaking the same emotions are experienced; i.e., betrayal, anger, sadness and vengeance as well, in some cases.

Profits should not be your focus when you trade.

When you think about it, entering into a trade is a relationship…it is a relationship between you and the market, meaning your beliefs about the market and the trade.  If you believe that the trade should go your way and that the markets must respond positively, and if you are emotionally connected to a profitable outcome, then when it fails you become despondent and/or angry.  This happens to a large degree because of the element of what I call the Tyranny of Certainty.

Certainty can and often does distort our view of reality; it obscures contravening variables and minimizes them.  Certainty often causes the Confirmation Bias, where unconsciously you only look for and consider data that confirms your initial evaluation of the prospect.  In other words, you are caught in an oppressive notion that leaves you cognitively trapped. Certainty has become your master.  Additionally, it can cause errant behavior; that is, you’ll do things that are designed to decrease the discomfort associated with those beliefs that cannot be fulfilled. Therein lay the tyranny.  It becomes a vice wrapped around your head and your mouse hand that forces behaviors like moving stops, chasing trades, premature exiting or doubling down on losers.  In other words, when you emotionally invest in profit, you are setting yourself up for head and heart aches not to mention reinforcing poor execution and implementation.

Free Trading WorkshopSo, what is a trader to do?  Well, one of the things to do is to re-evaluate the way you envision the markets and your relationship to loss.  What you want to develop is an I don’t care attitude regarding your trading.  You must look at the markets as being exactly what they are, totally unpredictable.  No matter how good a level looks, it is not a foregone conclusion that any particular outcome is definite.  What we look for is the high probability trade. There are times when the probability may get very close to 100%, but no matter how close it gets it can never be 100%.  This means that whenever you enter a trade you must embrace it as a possibility for loss. When you do this, it detaches you from the loss potential because you are prepared for it.

Of course, you already have begun this process whether you realize it or not.  You have put in a hard stop! This is imperative. The stop’s first and main job is to protect your capital.  If your capital is gone you cannot trade, so it follows that this is the most important part of your trading; and, of course it is derived from an appropriate risk calculation.

Further, in your preparation for a potential loss, ensure that your concept of loss is firmly engulfed in the belief that small losses are good…another paradox!  Why are small losses good?  They’re good because losses are inevitable; every trader experiences loss; and every small loss gets me closer to a big win.  So, what you must do is see them as they truly are; meaning, losses are just a cost of doing trading the markets.  Or, A loss is not a failure, but a lesson providing information that is extremely valuable.

So, are you getting the point? You’ve got to trade as if the money doesn’t matter, because the profit in any one trade really does not matter.  Of course we trade for profit, but that profit should be calculated as a percentage of trades entered.  The only thing that matters is how you do what you do … your process.  Process must be flawless and driven only by the standard of your execution and implementation which should be excellence.  Additionally, your edge is crucial as well.  Your edge is the consistent use of the Core Strategy referenced in the above.  But, there is no edge that is 100%.

Don’t be drawn into that seductive siren of profit.  Profit is gained by the methodical, unrelenting, consistent and ruthless application of the process. You must relinquish your embrace of the profit in order to set up the conditions for profit to come to you. This is what we teach in the Mastering the Mental Game online and on-location courses.  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

Dr. Woody Johnson – wjohnson@tradingacademy.com

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.

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