A Tale of Two Traders: Are You the Winner or the Loser?

I have just completed the beta version of my new course, the 4-Phase Framework. By its end, it was clear that the group had split into two camps: let’s call one ‘S’, and the other ‘F’. It was clear to me that ‘S’ would take the material, run with it and produce a much improved bottom line. It was just as clear that ‘F’ would probably not derive any benefit from the material.

Why you might ask?

The reason is a simple one. ‘S’ treats the market as a probability game. He does not look for a certainty of outcome. Instead, he looks for a certainty of process – the one thing that is under his control in the trading environment. ‘F’, on the other hand, looks for the certainty of outcome. He’s looking for that method, tool, indicator that will guarantee a winning trade. Of course, no such animal exists.

The one thing I learnt from Van Tharp is that our emotional state of mind is often the final arbiter of success or failure.

‘F’ suffers a loss and suppresses his fears. The problem is that fear does not go away; instead, it submerges itself under the iceberg only to erupt at the worst possible time. The eruption leads to impulsive trades that are a danger to ‘F’s’ trading account.

‘S’ suffers the same loss but deals with the fears in a different way. He acknowledges them, he accepts them, he feels them – but he does not allow his emotions to impact his behaviour. His acceptance allows him to manage the negative emotions. Instead of fearful, he becomes a detached observer. He is not driven by fear but instead driven by an objective state of mind.

If you find that you are producing a negative expectancy return, first check to see that if your method produces a positive expectancy. Most do this by backtesting. Nowadays, the preferred method is the Monte Carlo simulation.

If your method does have a positive expectancy, then check to see whether you are trading with a probability state of mind rather than a certainty one.

The easiest way of doing this is to check your Psych Journal to see the extent to which impulsive trades are impacting your account. The greater the impact, the greater the probability that you are trading from a ‘certainty state of mind’. Your job then is to substitute that certainty for a probability state of mind.

The post A Tale of Two Traders: Are You the Winner or the Loser? appeared first on Ray Barros’ Blog for Trading Success.