Wisdom and advices

[goldenedge]

The reason I'm starting a new thread instead of posting advices in my trading diary is that there's too much data there in my thread.

Ok, I'll start by telling my basic philosophy. It is that the only winners in the stock market are the best losers.

If you don't know how to deal with loss streaks then it's too hard to be profitable long term

 

[goldenedge]

It's important to differentiate internal loss and external loss.

External loss- the one you get while following your system. Well, you cannot always be right in the market , right? if you are right 6/10 then the other 4 trades come under this external loss if you followed your strategy and had the right mindset.

Internal loss- the one you make when you don't have the right mindset to trade or play your emotions in the market instead of just feeling 'meh' whenever you get a loss. Even if you do make profit while not having the correct mindset or not following your system, it is counted as an internal loss.

The reason why even you make profit while not following your system is a loss because in a long term your mind works in weird ways. If you make profit while not following your system then it is more inclined to take risks outside of your system, meaning- you'll give up all the profits to the market eventually.


The secret of the market? Before taking a trade automatically assume and imagine it will be a loss. If you are not comfortable while imagining your trade as a complete loss then you are either taking too much risk or you have mindset problems.

 

[goldenedge]

One important problem with traders worth pointing out is related to backtesting and trading mathematics.

Suppose my trading strategy is 60% profitable. What does it mean? Does it mean I make profit 6/10 trades in a row? It means nothing other than as a tool to explain someone about my profitability.

What if I'm 60% profitable and make 6 profitable trades in a row? Does it mean my next trade has a VERY HIGH chance of being a loss? LOL. There are two things most traders forget

1) Markets are dynamic and so is my profitability ratios. If backtesting a strategy is the key to success then everyone would be rich by now. As I said before, the only time you should care about trading mathematics is when you're analyzing your previous performance or explaining to someone (possibly investors and other clients) so that they can be assured that you make money. Think of it like a college certificate, it's useless except as a credibility for getting a job.

2) Every trade is independent from one another. Making 6 profitable trades in a row doesn't mean my seventh (or even tenth or hundredth!) has a higher chance of being a loss. This assumption is called monte carlo fallacy.

 

[goldenedge]

" If you occasionally break the rules and still have an unbroken string of successes, you are likely to compound the problem because you assume that you are better than other people and above the rules. Your ego inflates and you refuse to recognize the reality of a loss when it comes. You assume that you will be right. You assume that even if the market is against you, it will come back. Well, if I had an ego problem at one million dollars what kind of problem would I have had if I had ridden through the valley of death and cheated death? If I had survived the loss and the market had gone on to make money for me, my ego problem would have been much worse. "

The reason why you need to set up a few trading rules and follow them no matter what is because of the above. Yes you will make money (much more than you usually make) while breaking the rules once or twice but it becomes a habit which takes you to the top until you collapse into yourself and ruin everything. The higher you go , the more dangerously you fall. Crazy thing is that falling is inevitable at one point or another.

This is why, have some rules for trading. Maintain a profit and loss limits for the day and a basic trading strategy+plan . Once it hits either your profit or loss limit for the day/week/month, then get the hell out for the rest of the time and either chillout or learn more about trading. Suppose you hit your profit level today and you saw a trade that's really good . You take it. Now you made much more money!! After sometime or after repeating this pattern for a few times - you can't believe the money! You start to assume that your strategy is what holding you back all these days and there's lot more money you can make per day.

This cycle repeats until you inevitably end up where you started (or much worse). Most people can't make long term money because they don't know why they lose it all. The above is the reason.

 

[goldenedge]

To be completely honest, life is also just like day trading.

A few days you'll be fully focused , other days completely neutral or slightly if not fully distracted. It's bad to even expect that your mood will always be focused everyday.

With that being said, you shouldn't associate your trading to your moods ever. Even if you're unfocused , maintain a system with clear rules especially on the losing side. You might be inclined to move stop loss for whatever reason or average the position by adding more . Don't do this.

Follow strict rules. Everyday won't be your best day or your worst. Maximize the best days and minimizr the damage on worst days. But it's not as simple as I said. Our brains are naturally inclined to do the exact opposite.

 

[PuffQueyFantastic]

When we experience a period of failure, we become pessimists. In fact, a trader should worry about a loss only if he was trading against the trend or breaking the rules of his trading system. Professionals that loses are not a big problem, and it happens regularly. There is no reason to start being upset if you lost some money, but at the same time did everything right, were disciplined, and did not do stupid things. But on the other hand, there is no reason to love losses or to treat them indifferently. Your reaction to losses is a reflection of how you received these losses, how accurately the rules of the trading system were followed. Loss line is a signal that a trader is doing something wrong. It is a signal that you need to move away from the market for a while.
If you start being pessimistic, then you fall into the trap of the past, your present is destroyed, and the future disappears. One failure with uncontrolled pessimism can lead to a destructive streak. Losses are an integral part of trading, and one of the main differences between successful traders and the rest is not how much loss they have, but how they deal with these losses. The ability to lose is the key to being a winner in the long run. The calmer you endure failure, the more profitable your trade will be.