Focus On Trading Process And Not Results

In conversations with new traders about trading and the trading process, I am often reminded that what they are experiencing is the same thing that I had experienced in the early days.

Actually, it’s probably what 99% of new traders experience when they first open a chart and learn about trading.

There’s a lesson right there about not taking anything personally when you are trading since what you are going through is not unique.

I did approach the beginning years of trading a little differently than others.  I never got hung up on the numerous forums, indicator hell, $37 e-books or the humorous “trading robots”.  I was always aware that if it were that easy, the failure rate would not be as high.

At the end of the day, trades are made by humans.  Even the algorithmic trades had to be programmed by a human.  I realized that generally, my failings were my own.

Realization and acceptance however are two vastly different things but you have to see a problem before you can fix it.

Overall Trading Results Are The End Game

During my communications with new traders, many times they judge performance by a handful of trades. If the system or method has piled on the winners, they credit the system and they credit their own trading ability.

The losses are a different story. 

The losses are all about the system and the failings that it has.  Take too many losing trades and many people place the blame on the system and go on to search out a system that will serve them better.

This is usually not a good idea.  The first thing a new trader must do is look at the big picture.

The system can never be defined by a handful of losing trades. It’s the results as a whole that will paint a true picture of the system you are trading.  Besides, if you did a proper back test you already know that a string of losers is expected and that your system should be winning more on winning trades than it loses on the losing trades.

The issue is that many traders look at each trade and decide whether it was a good one or a bad one to take.  This type of logical and analytical approach is the wrong one.  There is another approach that will lead you in the right direction.

Your Trading Process Is The Ticket

What this means is to not have tunnel vision on results.  Instead, focus on the entire trading process from start to finish and if you have an edge, the results will speak for themselves.

Breakout trading. Focus on the process of implementing your trading edge<strong>Let’s pretend for a moment that the above chart is indicative of your trading process.

  1. After seeing low momentum in the move upwards, strong selling action took place and you look to position in the direction of the thrust down
  2. Price rallies and gives you a price zone to look for price to breach on a test
  3. You need to see price range with a hint of selling over buying pressure inside the range
  4. When you see a strong thrust out of the range, you look to initiate a short at the close

That outlines your trade plan and in this case, everything has lined up in accordance with the plan.  You enter your short order as dictated and let the trade play out.

This trade goes slightly in your favor before beginning a retrace back into the zone and once price clears your range at #3, you take your stop.

Who Is To Blame?

The issue is that this is the third loss in a row and after losing a total of 6% of your trading account, you head back to the drawing board because it’s “clear” that this method no longer works.

How else can we look at what occurred?

Before trading any method, you’ve done your back testing and you have determined that this method actually has a positive expectancy.  You should also know what a normal string of losing trades will look like.

So we assume that the trading method is not at fault as it performed well during non-optimized testing and you have been able to be well positioned in prior winners.

  • You look at the trade on your decision in the moment and you executed perfectly.
  • Everything that needed to be in place to take a trade was there.
  • You accept that losses are a part of trading.
  • You look at your stats and determine that this is simply the nature of the trading business

You decide to only make a decision on the whole…not the singular trades that make up the whole.  Dealing with outcome bias is a tough one and takes a ton of mental energy to overcome.

Doing so will save you a ton of wasted time in jumping from strategy to strategy and dumping a potentially lucrative one.  This applies to winning trades as well.  The win is not as important as the quality of your decision in taking the trade.

To answer the question, there is nobody or anything to blame.  You focused on the process of implementing a positive expectancy trading method and accept that there is a random distribution of wins and losses.

What this will do is not only stop you from jumping from method to method but allows you to take full control over the only thing you can control in trading.  That is your actions.

That is how you judge; through your execution of the strategy and the results of a basket of trades.  Anything else is just a mental burden that will not produce the trading success you desire.

For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.