The following chart was sent to me by a trader who just completed his very first futures trade.
It shows the MNQ (Micro E-mini NASDAQ) on a 3 minute timeframe, YTC Price Action Trader BOF Setup off the overnight low and prior day’s low support.
A one part position (all-in-all-out).
He took a small loss, scratching nicely before the stop.
His question though…
- What did I do wrong?
(You’re going to want to click on this chart to open a larger copy in your browser. I had to shrink it to fit in the blog page!)
The question again…
- What did I do wrong?
Firstly, please remember that it’s also important to focus on what you did right. Because there is a lot here that is good.
But what was wrong?
Simply that you stopped at one trade.
You already observed that there was a second opportunity with the same trade idea that would have profited. Had you taken it you’d be one for two with a nice profit overall.
But I don’t want you to stop at two.
I want you to consider twenty trades as a minimum, before you pause and conduct a deep-level review.
If you have any problems with target selection or trade management decision making (or anything else), then these will become evident over a larger series of trades. Individual occurrences are quite possibly irrelevant.
Let me remind you of this social media post from a few years ago.
This is the path. Trading a series of trades. Not individual trades.
Trade a full series. Find where you reside on the pathway. Look to your stats and deeper-level reviews to identify areas of potential improvement. And then work to actively drive further growth and development.
Please also read this prior blog post. This was based on very similar Q&A and will explain the idea in a slightly different way. https://yourtradingcoach.com/trading-business/one-trade-does-not-provide-enough-data/
Trade one is done. Nice work. I actually do like it. Now let’s see trades two to twenty.
I totally agree. I have started in the real market this year. Although it has been a strange year I have realized many mistakes both operational and emotional that have returned me to an earlier stage, even to enter again in paper trading. The scheme you put forward is most successful, little by little to achieve consistency and being patient. Thank you for your contributions Mr. Beggs.
Constant and never-ending improvement. That’s the goal. Best of luck with your trading in 2021.
The House always wins. It’s a mathematical certainty. It’s just plain odds. Understanding this is not sufficient enough for a trader to be successful.
It is absolutely imperative that this concept is buried so deep into the soul that it becomes an attitude that will ultimately effect actions taken in the markets.
The casino profiting system cannot exist without losses. The losses are the most important element. If players never won, why would anybody even bother gambling? These house loses keep players coming back and placing bets. And through a series of placed bets the house will ultimately profit. Yes, there will be volatility in win/loss ratios. Sometimes the players will do great and sometimes the house will do great, but given enough time the spikes in volatility will smooth out to their statistical mean and volatility will become moot. It’s a mathematical certainty.
So, why are losses so crucial in trading? It seems I can profit just fine if I never lost in a trade. But, there is an important reality of the markets: there is no Holy Grail. No strategy will provide a 100% win rate over time. Dollar cost averaging where time frames are measured in quarter centuries is the closet a market participant will experience risk-free trading. But, for those of us who don’t want to wait 25 years for a trade to play out, losses are as inevitable as death and taxes.
Losses are important in trading because they are unavoidable. Just as much as wins are unavoidable. Once an edge has been established, both losses and wins (although important) become irrelevant. They actually don’t matter anymore. Once an edge has been established, the only thing that matters is that trades are taken. Bets need to be placed so that the statistical average can play out over time, say 3 months.
Within the context of a statistical edge, losses are no more meaningful than wins. They are both benign. Imagine a casino panicing because roulette players are getting on a hot streak and winning more than average. They get emotional over these loses and shut the wheel down and accept the losses as final. That would be the worst thing to do. To profit, the casino needs to keep the roulette wheel open and allow as many bets as possible so the statistical mean can play out. It’s the same thing with trading.
Just think of your trading edge as a roulette wheel. The statistical advantage is built into the wheel itself and the layout of the wheel never changes…ever. So, our trading edges need to be fully understood and defined, so that there is consistency in their composition. Just like the roulette wheel, the layout of a trading edge cannot vary….EVER. No random or impulsive trades. A trading edge needs to be understood in terms of mechanics and context. What is the exact list of requirements needed for a trade to be considered an edge trade? Define your edge and go back 90 days into the market. Look for your edge and create examples. Define higher time frame requirements, upside and downside space requirements, uncertain or directional conditional requirements. Consider context as much as possible and then go back 90 days to see if it’s viable. Get it figured out and mold it into a cast that cannot be broken. And when you see it – trade it. Don’t shut down the roulette wheel. Place your bets so the spikes in win/loss volatility can smooth out over time. Wait, hunt, identify and strike. Rinse and repeat.
So, what did the trader do wrong? Well, the fact that he thought he did anything wrong is so wrong in itself. It was just a loss and completely meaningless in terms of a statistical edge. Thinking he did something wrong is a dangerous road to be on. It’s the road of the gambler looking for hot streaks. It’s the road of the player hoping to win. Don’t be the player or the gambler…..be the House.
Thanks Lance. Happy new Year.
I’m reminded of my favourite Mark Douglas quote (from The Disciplined Trader), “Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt.”
On similar lines, most people rationally know that there will be losses, but what they really want is for every trade to be a winner.
We’re not wired for operation in an environment of uncertainty.
Not until the idea of edge is, as you said, “buried so deep into the soul” of the trader.
We know it right from the beginning. But we don’t “KNOW” it. Not until, for most of us, a whole lot of pain and a whole lot of soul-searching.
Only then, when we come to understand and accept the concept of edge and the nature of a probabilistic environment, do the winners and losers become somewhat irrelevant.
It’s my hope that through encouraging analysis of results over a series of trades, some traders will start to see the irrelevance of individual trade outcomes. It’s empowering to see a sequence of trades and finally realise that these losses (if kept within money and risk management limits) just can’t hurt me.
I’ve become interested in concepts of mindfulness, particularly the “fast” mind and “slow” mind thinking. It made me realize that all my trading issues are coming after I enter a trade. I’ve adopted the “all or nothing” approach to post-entry trade management. It’s forced me to pay more attention to stop, entry, and target geometry and HTF awareness. I know you don’t (personally) favor this method but, for me, there is a lot of promise in this method actually being the bridge to FULLY accepting the “wins and losses are irrelevant” mindset.
Since I’ve been employing AON, I’ve seen every outcome: making it 95% to my target only to end up being a loss, but even more times making it 95% to my stop and end up being a full size win and everything in between. I know there will be volatility in short term win/loss ratios, but it’s been liberating to know once I enter the trade my job is done. After this point, I’m trusting the nature of statistical edge to play out in my favor over sufficient time. I actually turn off my monitors after I enter a trade. I have a text sent to my phone when the trade is complete and have no real reason to actively watch the trade play out. With this method, I’m basically saving myself from myself. I have a lot of fight in me and losses tend to rile me up. So, during the time my monitors are off, I get on the treadmill and perform a mindfulness sequence to ensure my mind is in a “slow” state when I return to the computer. So far, I am more than pleased with the results. It’s bringing me closer to “responsible” trading. It’s really invigorated my trading and I enjoy trading more placing maximum emphasis on the “one good trade” mindset.
Anyhoo, I’m grateful for all your content. I’m always excited to see what your next post or tweet is.
Take care Lance,