Decision making while trading- theory.

goldenedge

Well-Known Member
#1
We put 1000's of hours in trading. We know the patterns, the price action, indicators, trade management and psychology.

But why do we still make the beginner mistakes. It's easy in theory to say "book small losses" but why is it infinitely hard while doing it in real time? I have a theory to explain this.

There are two different approaches of thinking...1)process oriented 2) outcome oriented. I'll link below the research article for those who want to understand in depth on how decision making is a result of your approach.

To put it simply, if you are outcome oriented (want to make xx rupees per trade, for example) then it will be hard to make a decision to close the trade when the loss is small because it affects your "lifestyle".

If you're outcome oriented, then during a loss your brain subconsciously views losses as a threat for achieving your goals(profits). This damages your decision making. As long as you don't close a trade, you still aren't in a loss, right?:lol::clapping: If you're process oriented then not following the process is the threat for achieving your goal(sticking to the process).

It's a basic natural instinct.

Research: pdf

Extra reading:

This the only way to solve the "hard losses" problem. Change your thinking to a process oriented one. Not following your system should be the threat and following your system should be goal.

When I was first changing my thinking, I felt uncomfortable while trading. Eventually I made it through. The key lies in sticking to your system no matter how it affects you. It will take some while but after a month or two your trading will change.

I am not saying that you mustn't focus on the profits. I'm saying that making profits shouldn't be your primary goal. When you succeed and make a lot of great trades then it's you should be allowed to smell the roses of your hard work because it gives you a motivational boost. But, it's important to understand that the beauty of the roses lies in their "transience".;)
 
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trader.trends

Well-Known Member
#2
The process oriented approach is what had led to a better performance for me. It is not difficult to discover a system that suits you which has the edge. Once you have a system with an edge, you know the probabilities of the trade. If my system says the win loss ration is 50:50 and the average winners will be 30 points and average of losing trades is 20 points, then I know that for the Edge to manifest, I should take 100 trades for a net of 500 points.

I changed my thinking to say, I will take the next hundred trades only on this system and avoid all other temptations. I managed it with about 5 Random trades which were losers.

The day you eliminate Randomness from your trades you begin to see positive results. And Randomness has three dimensions 1. Random Entry, 2. Random Exits and 3. Random Position Sizing. Before I put on a trade I ask myself would I do this for the next hundred days (Example, early exit or change of position size), that question will make me stick to my system.

When I put on 100 trades on a single system, I focus on the process and the expected probability of the trades manifests itself. I am not praying for luck in my trades, I am praying that the probability that I saw in the backtest should manifest in my Real trades.
 

goldenedge

Well-Known Member
#4
I don't mean that you should follow your system like a robot. All I'm saying is that you should have a clear process-- it can be strict one or not..depending on your mindset.

A clear way of thinking/analyzing instruments requires you to have a process oriented mindset..that's my point.
 
#5
I think that the main thing in trading is not to forget about the competent analysis and study of all the issues that are related to your chosen strategies. It will never be enough here, and you can never stop here...
 

mohan.sic

Well-Known Member
#6
The process oriented approach is what had led to a better performance for me. It is not difficult to discover a system that suits you which has the edge. Once you have a system with an edge, you know the probabilities of the trade. If my system says the win loss ration is 50:50 and the average winners will be 30 points and average of losing trades is 20 points, then I know that for the Edge to manifest, I should take 100 trades for a net of 500 points.

I changed my thinking to say, I will take the next hundred trades only on this system and avoid all other temptations. I managed it with about 5 Random trades which were losers.

The day you eliminate Randomness from your trades you begin to see positive results. And Randomness has three dimensions 1. Random Entry, 2. Random Exits and 3. Random Position Sizing. Before I put on a trade I ask myself would I do this for the next hundred days (Example, early exit or change of position size), that question will make me stick to my system.

When I put on 100 trades on a single system, I focus on the process and the expected probability of the trades manifests itself. I am not praying for luck in my trades, I am praying that the probability that I saw in the backtest should manifest in my Real trades.

excellent.
 
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