Today’s lesson is going to ask you to dig deep within yourself and ask, “How bad do I want this?” How bad do you want to become a successful trader? Are you willing to do whatever it takes, even if that means significantly changing how you think about trading?
Most people find change very difficult. There are things involved like egos, pride, being lazy, etc. But, the simple fact is that change is the first step toward putting a ‘cork’ in your old trading habits which have been destroying your account, and getting on the path to trading success.
What follows is a brief discussion of why and how you need to change your thinking to succeed at trading. If you read this whole lesson and really make the change to your thinking, you will experience a significant improvement in your trading experience and performance.
First, you need to change how you think about trading
One of the things that gives traders a lot of trouble, is getting too attached to any one trade. In fact, you should have zero emotional or mental attachment to any one trade you take.
As I discussed in my article on randomly distributed winners and losers, whilst your trading edge might have a certain winning percentage, let’s say 60%, you need to understand what that means…
What a 60% winning percentage means: It means that over a large enough sample size or series of trades, you can expect to win about 60% of the time.
What a 60% winning percentage does NOT mean: It does not mean that any one trade has a 60% chance of being a winner.
Many traders get confused into thinking that ‘this’ trade will be a winner, or even that ‘this’ trade has a 60% chance of winning, when in fact this is simply not the case.
To think about this from a different perspective, imagine a large jar of marbles of two different colours, let’s say red and blue. Let’s say each marble represents a trade that you took, there are 100 marbles total, 40 red and 60 blue. The red marbles are losing trades and the blue marbles are winning trades. So, you have 60% winners and 40% losers, when translated to your trading method, this shows that you can expect to win 60% of your trades.
HOWEVER…here’s where the thinking part gets tricky. If you shake up that jar of marbles so they are randomly distributed within the jar, and you stick your hand in blindly and pull one out, you don’t know if it will be a red or blue marble. Thus, you would not be ‘expecting’ a blue marble, because you know there are red ones in there as well, randomly distributed.
This is how you need to think about your trades. You need to think about them being randomly distributed events, even if you expect to win 60% or even more, over time. Once you begin to realize that any given trade has an equal chance of being a winner or loser, you will stop giving too much emotional and financial importance to any one trade. Once you do this, it opens up the pathway to carefree trading and allows you to truly induce the proper trading mindset.
I get emails from traders telling me they are ‘excited’ about a trade setup. This makes me cringe because it implies they’re expecting something from that trade setup, they’re expecting it to work out for them. But, they shouldn’t. They should have no expectation of any ONE setup, because each setup has a random outcome. It’s the SERIES of trades while trading our edge (price action) that gives us a chance to make money.
When you remove all expectation and attachment to any one trade, you automatically begin to do other things properly, like managing your risk properly and not fiddling with trades after they’re live. Because you realize that each trade setup may or may not work out, you don’t want to over-commit to it and you don’t want to get in its way. You risk an amount you’re OK with losing and you let the market do ‘its thing’, because you’re just letting your edge play out over a series of trades.
Think in probabilities to avoid emotional trauma
Think about a slot machine for a minute. You put money into a slot machine knowing upfront that it’s a random event, so you have no real expectations of winning or losing on any pull of the arm. Thus, expectations of the outcome of a slot machine are in alignment with the reality of the event itself.
In trading however, you see a pattern form in the market and because maybe the same pattern worked for you last time you start to expect that it will work again this time. Once you commit to this way of thinking you are setting yourself up for potential disappointment and emotional trauma. You are forgetting that each trade has a random outcome that is unconnected to your recent trades. Just because this same exact pin bar was a winner before, does not mean the next one will be, even if it’s exactly the same.
Now, obviously if you have an effective trading edge like my price action strategies, you can greatly improve your chances of a winner over a slot machine, but still, the outcome of any one event (trade) is random. So, you cannot allow yourself to be affected by the result of any one trade.
This trade has no influence or connection to the next trade. If this trade was a loser, the next trade might be a winner (or loser) and if this one was a winner the next one might be a loser (or winner). If you have a 60% win rate on your edge, remember that it is realized over a SERIES of trades, and that might mean you have 5 or 10 losing trades in a row. It doesn’t mean you panic though. You stick with your plan and strategy and you keep taking the trades as they form, because you need to trade a large enough sample size to see your edge play out.
Your goal should be to eliminate the potential for the market to disappoint you by realizing that trading is not about being right or wrong. This is how you to need change. You need to eliminate any potential for disappointment from your trading by thinking in probabilities. Remember the jar of red and blue marbles the next time you enter a trade. You are simply blindly dipping your hand into the marble jar each time you take a trade, so don’t expect to pull out a blue marble, just know that it will be EITHER a red OR blue marble, and that once you pull them all out, you will have 60 blue (winners) and 40 red (losers). IF you can do this, you will be thinking in-line with how the market actually exists and you will be putting yourself in position to profit from the market, rather than getting battered by it like you probably are now.
How to eliminate trading mistakes and start making money
All blown out trading accounts are the result of a snowball effect of trading mistakes. You get too attached to a trade that you ‘just know’ looks ‘so perfect’ it ‘can’t possibly fail’, and so you double up your risk or triple it, hoping to hit a ‘home run’. When that trade then fails, you experience severe emotional trauma and frustration. This causes the snowball effect to begin. You start feeling mad that you lost, you get angry, so you jump back into the market and risk even more, hoping you make back your lost money. This can go on and on until you blow out your account, which doesn’t take very long.
The point is, all of this emotional strife and frustration and the snowball of trading mistakes it causes, can be AVOIDED by changing how you think. That is to say, by thinking about your trades in terms of probabilities, as discussed above, you will circumnavigate the main reason most traders lose money; expectation.
Think about when you were demo trading. You probably did awesome, as many forex traders do. Why did you do awesome? Because you had the right trading mindset… You had no real expectation about any trade because no money was on the line so you didn’t care if it that particular trade lost or won. That’s it right there; you have to not care if you lose or win on any one trade, and you do that by thinking in terms of probabilities. IF you can do that, you will be well on your way to finally making consistent money in the markets.