Learning how to make money and develop as a trader is probably more to do with process than hitting on a magic formula. Of course it’s fantastic to find a tried and tested trading strategy, but if you don’t have the right mindset and methodical approach, you’ll probably struggle to understand the difference between something that takes a few losing trades and something that just doesn’t work. By using a journal, you can track specific metrics and identify their precise impact on your p/l over time.
THE DANGEROUS GAME OF LEARNING BY TRADE OUTCOMES
The problem is that when you take a loss or you get a nice winner, you’re often not in your most objective frame of mind. But the emotions that trading can draw out of you will often be strong and these can create powerful memories about what does and doesn’t work. So a few great winners or terrible losers can really make a trader decide whether or not something works. But the logic behind this rational could be entirely flawed.
Conditions could be exceptional – for example, there could have been some major market moving news or there could have been executional errors impacting the outcome of the trade or simply there could be a string of reasonably expected losses. Without recording accurate trading results over the course of a reasonable sample set, you’re relying on emotionally rooted memories of certain trades. Learning about your strategy from decent sample of trades when you’re in an objective state of mind is a much more dependable path to follow.
SYSTEM JUMPERS AND CLINGERS ON
This emotional type of learning can explain to some degree why there are so many traders are either jumping from system to system and also those who won’t let go of a strategy once it’s stopped working. The “jumpers” get nervous about a system that shows a few consecutive losses or simply don’t recognize that they are making mistakes in its execution. The “clingers” don’t refuse to believe, even in the face of the trade stats, that their strategy just isn’t that profitable any more. They remember the great winners it produced in the past and believe the next one is just around the corner. Even worse is if they give up on it and the very next trade is a winner – this is only likely to give them renewed false hope.
LOG AND REVIEW
To properly assess your trading performance, you must focus your efforts on accurate strategy execution and logging your trades properly, rather than the outcomes themselves. Every strategy will have losing trades, so the outcome of an individual trade should be irrelevant. The only factor should be that the trades are taken in accordance with your plan – this way, the conclusions you are able to draw from your results are far more likely to be reliable. Additionally, if you make sure that you periodically review your results (either weekly/monthly or every 30-50 trades is a good start) rather than interpreting them as they happen, you’re going to get a much more accurate and objective picture of how good a strategy is.
If you’re going to survive as a trader for very long, it’s critically important that you learn and adapt with changing market conditions. And even the very best traders are constantly learning. But there’s a big difference here – the best traders make every effort to learn. They observe, they log, they theorize, they test, they review and so on. They excel at interpreting the often ambiguous nature of trading results and market activity because they are diligent students. So make sure the lessons that are available to you as a trader are learnt when you are reviewing your trade log and not in the heat of battle.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.