25th August 2021
It's common for amateur traders to place far too much emphasis on the outcome of a single trade.
We see an idea and imagine how a single trade could add to our trading account in a meaningful way.
If it works, that can create feelings of euphoria. If it doesn't, and we suffer a meaningful loss, it can cause us to feel deep frustration. We need to take a step back and see the bigger picture and not place so much emotional emphasis on a single trade.
Consistency In Trading
Trading is not a "get rich quick" endeavour. Doing it properly is actually a "get rich slow" endeavour. It's about consistency, discipline and executing an edge over and over and over to create a P&L curve that moves gradually higher with shallow drawdowns and, ultimately an exponential growth trend as returns compound over time. It's about understanding that there will be losses along the way, but they need to be kept small so that you stay in the game and are able to execute the next trade without hesitation or fear.
Those who have known me for a long time will know that I love to make sporting analogies when it comes to trading, and that I've often compared trading to cricket. So here goes again...
Think of a top-class test batsman. Think Brian Lara, Donald Bradman or Sachin Tendulkar. These players built phenomenal career batting averages. How did they do this? They did it by batting shot after shot carefully and skilfully, protecting their wicket and making runs when the opportunities presented.
They didn't get there by trying to hit a six off every ball. Often they needed to block the good balls (good defence), take singles where possible, and occasionally a four or a six would be possible when a loose ball came along. But they realised that each ball they faced was just one of the next many balls they would face in any given innings. What was most important in building such impressive batting totals was protecting their wicket - not going out. Because once you're out, you cannot score any more runs.
In trading, we need to see things in a similar way. We need to understand that every day in the market is an opportunity and that we need to assess each opportunity in the context of our trading edge and execute accordingly. Some days the market will offer us no clear opportunities (a dot ball).
Some days there's a trade on offer that we take with caution (a single). And some days, the market bowls us a loose ball that we can hit with more aggression. But we need to see every trade opportunity as just one "ball" being bowled to us out of many balls that will be bowled at us. Know that more balls are still to be faced over time, and that more opportunities will be available. But if you go out, you won't be around to face those balls.
Keeping losses small is paramount, and understanding that an individual trade is not going to make our trading career on its own is also very important.
It's going to be just one trade out of many trades we will take over our careers as traders.
See each trade as just one trade in your next 1000 trades. As long as you have an edge with a positive expectancy, then over several trades, your approach will allow your P&L curve to gradually push higher. Important is to make sure that the losses are kept small along the way so that your drawdowns don't do too much damage to your financial capital or to your confidence. See the bigger picture of your trading career. See each trade as just one of the next 1000 trades.