Today, we're going to be talking about building a professional trading mindset. While this topic has been the subject of countless books and trading literature over the years, we thought it would be cool to break down a few of the most important takeaways for the TradingView community. Let's jump in!
1.) Start thinking in Probabilities š¢
Let's take a quick look at one of the most important concepts in Trading and in life: Expected Value.
Expected Value is simply a number which indicates, based on probabilities, the value of executing a certain action. It can be positive or negative. Will this trade make money? Should I change careers? Should I marry my partner? It all comes down to Expected Value. Now - What makes up Expected Value? 2 things: Bat Rate% and Win / Loss.
Bat rate is the percentage of wins vs total outcomes. Win / Loss is the size of the average winner divided by the size of the average loser. In other words; What is the chance this works? How big is a win? How big is a loss? When you combine these numbers, you can much more clearly understand whether or not it makes sense to take a certain action.
Let's say, for example, that a certain trade idea has a 50% chance of working. A win earns you $2, while a loss loses you $1. Should you take the trade?
Let's find out. In this example, you take this trade 100 times. 50 times, you win $2, and 50 times you lose $1. You'd end up with a total profit of $50! ((50x2)-(50x1)). Clearly, this trade has positive expected value! So, even if you take the trade and end up with a loss, you still made the right decision, from an EV standpoint.
The tricky business with Expected Value is that Bat Rate and Win / Loss aren't hard numbers. They are estimates. Thus, building a feel for the likelihood of something happening, and building an understanding of the amplitude of wins and losses is a key skill to build for trading and life. An easy way to better calibrate your antennae for this is simply making a note of what you expect to happen in your trading journal. Over lots of repetitions, your ability to guess outcomes should improve.
2.) Self awareness šµāš«
In trading, actions of all market participants at all times are driven by 2 fears: The fear of missing out and the fear of loss. In other words, fear and greed. The thing is, depending on your brain chemistry and life experience, it's likely that one of these fears impacts you more strongly than the other.
Think of the following scenario: You put on a trade, and the position begins moving in your direction. The asset then begins trading sideways. Let's examine two ways this could go:
a - you close your position. Then, the asset begins ripping in your direction once more, tripling in price. You've missed this extra move, now that you've taken your position off for a small gain.
b - you don't take the position off, and the asset round trips back down to your stop loss, and you take an L on the trade.
Which of these scenarios is more painful to you? There's no *right* or *wrong* answer, but it's important to know which fear has a stronger hold on the decision making complex in your brain. If you find that you're more prone to FOMO, then try to figure out a strategy where you can squeeze every last drop of a winning trade. If you're more prone to the fear of losing, then try to figure out a strategy where the possibility of taking big or consistent losses is much less likely.
3.) Strategy fit is extremely important ā
This tip piggybacks off of the last tip about self awareness, and really underscores the importance of consistency in interacting with the markets.
When you interact with the markets, having a written out, well understood trading plan is key to success. The biggest and most elite hedge funds in the world have clearly defined investment mandates, best practices, and business plans. What makes you think you don't need a plan?
That said, not all trading plans are created equal, and even the best laid plans of mice and men...etc.
When designing a trading plan, many new or intermediate traders focus solely on the money making aspect. As in, 'which strategy is going to earn me the highest amount of profit over a given period of time.' How can I gain some edge? Typically backtests, fundamental research, vision, and more play a part in helping define the criteria for a profitable strategy.
However, expert traders know that there's something even more important than defining your edge; ensuring consistency.
For example, let's say that you come up with a perfect trading strategy that should, in theory, in the future, allow you to trade extremely efficiently. The plan lays out a perfect set of criteria for buying market bottoms, and selling market tops. For newbies, this is the holy grail. However, just because you *understand* a strategy doesn't mean that you will be able to *execute* the strategy.
You could test this perfect strategy in real life, and if you're unable to execute the set of rules you've laid out for yourself in the heat of the moment due to your psychological makeup, then it doesn't matter how much edge the strategy has. You can't execute.
Thus, finding a strategy you can will yourself to execute with consistency, no matter what is happening in the markets, is of paramount importance.
In terms of expected value and self awareness, having a strategy that's 30% efficient but you can execute with 100% certainty is much more valuable than a strategy that's 70% efficient that you can only execute accurately about 40% of the time.
Not being stressed from a loss is the real flex. Design around preventing mistakes, not losses.
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Anyway, thanks again for reading, and have a great weekend! Let us know with a comment below if you learned anything, and we'll consider doing a full series on applied trading psychology.
Thank you for the tips and tricks tradingview! Love your platform
ogadzieva
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MillionaireEconomics
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fantastic analysis!
WP_traders
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"You could test this perfect strategy in real life, and if you're unable to execute the set of rules you've laid out for yourself in the heat of the moment due to your psychological makeup, then it doesn't matter how much edge the strategy has. You can't execute." - This hit harder than the rest. I've backtested and developed trading strategies that clearly net a profit from backtesting, but executing these trading strategies is another thing. The psychological aspect takes over, the fear or greed takes control and your strategy might as well be crumpled up and thrown in the bin. Understanding and managing your emotions and the psychological fear/greed is the biggest thing a trader needs to keep under control, before even thinking of entering into a trade. I was lucky in my first months of trading crypto, I netted 400% profit from a very conservative trading strategy, taking 1.5:1 risk/reward. This was a major mistake for me, as this over inflated my ego, gave me stupid confidence in my trading ability and in turn, I lost my 400% profit, along with 75% of my original deposit - two main reasons: First, I lacked the knowledge and understanding of the psychological aspect and secondly, I jumped straight into Futures following my 400% profit in spot. Leverage DOES NOT mean more profit, it means more RISK. I was trading @ 25x leverage and managed to have a few successful and green days before it all went horribly wrong. My TA was not sufficient, my knowledge of price action was significantly lower than it should've been and I failed to read the market (well, I did read the market I just made silly mistakes opening trades in the opposite direction the asset was going on). Overall, I feel the best trades we can make at times, are none at all. FOMO is a major player in people parting with their money, I've seen friends lose their entire balance after jumping in on a trade out of FOMO for the market to take a swift and steep reversal. You can never really stop learning when you are a trader. Anyone that claims to have 100% win rate and a "secret" algorithm just wants your hard earned $$$. If these guys had the perfect strategy, why on earth do they need your money? Never pay for signals, never pay for "exclusive" groups and definitely avoid any form of pump and dump scheme in the crypto market, they are all scams and just want to make quick, easy money from new, unsuspecting traders. Also, if you trade crypto, stick with the top coins, avoid any potential new "moonshot" - history has only shown us that the majority of these ICO's are scams. Crypto is still new and only starting to be adopted by financial institutions as well as deep pocketed retail investors. Thank you for sharing, it was a great read and it has put me in the right mindset to tackle the markets following a 5 day holiday. Best of luck everyone!
mgball57
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@WPTraders, Amen!
peter222222
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wow, first real post I see here in forever. The bigger the profits the bigger the losses. I feel whenever I step in the market for a couple of trades the entire market shifts and I am ending up in a huge loss. at the moment I am invested in the overall market with a little leverage and hope it turns to ATH, otherwise I am in at a huge loss. Right now I am 20% down and this really hurts. I can only imagine how 75% feels.
WP_traders
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@peter222222, This is how I always felt but it was clear I was doing something wrong. Perhaps re-evaluate your trading strategy, or if it is a solid strategy, ensure you are sticking to it 100%, only opening positions when it fits your trading strategy, not when only half of it is met. This is just an overall tip that really helped me realise my mistakes. And as I mentioned, leverage always equates to higher risk, not higher profits. Good luck and I hope your accounts stay in the green!
peter222222
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@WPTraders, very true. I am just playing the overall market and seem to be always wrong. When I traded with stop losses it seemed to always hit them and then reverse. I guess sticking to the strategy is the hardest part. I also read a lot about back testing the strategy but I dont know how this should be done when you dont only rely on automation trading strategy. I wish there would be something like a put me back in time and trade paper and not only paper trading with the current market. Anyway thanks for your advise.
GregBrock
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@WPTraders FOMO is the worst trait a trader can have imo. It's the thing that drives gambling addiction the most. A gambling addict will keep losing and losing because he got such a high on that big winning streak he had once before. I feel it all the time but I keep reminding myself that there is always another trade. it's like women and taxi cabs- if you miss one you can get catch the next one, lol. It's also the thing I fight the most and the source of my biggest losses. Recently I have pushed myself hard to only take certain trades. It has been working really well but the temptation is still there. I feel it all the time especially when I'm on a losing streak.
Dimdim7
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The insight that I gained from this article is similar to the philosophy of the intelligent investor by Benjamin Graham. What Iām understanding from this article is to not be in a rush. Demonstrating patience to develop a proper strategy that works in any market sounds like a skill that is developed over time. So this is really good knowledge to add on to in general, especially for new traders. Thank you.