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Here’s an unfortunately familiar story for us here at Sanglucci.com: a young trader decides to try his luck in the markets. He reads a little online, watches a few free videos, maybe follows an alert service promising ridiculous gains, and then starts throwing his money around.
One day he decides to buy up some cheap, out of the money calls in Tesla. Those cars are sexy as hell, Elon Musk seems like a genius, and after spending a few hours self-educating he thinks he’s got this options stuff figured out.
The next day a headline causes Tesla to rip. His calls go through the roof, and suddenly he’s sitting on an easy $50,000 in profits.
Sitting next to him, you’d be hard pressed to argue that this was the worst thing that could’ve happened to him.
But we can tell you, it was. Because the rest of that story usually goes something like this: upon seeing those zeroes in his account, the young trader gets the strongest surge of dopamine he’s ever experienced in his life, straight to his brain. Now not only is he hooked, but he’s telling himself that he’s the reason for his profits.
So he goes and does what anyone else would do by repeating what worked the last time around. And that’s where the story takes a turn for the worse. Because this young trader had no replicable edge, and that means as time goes on he’s bound to give it all back.
Which happens nearly every time, and often then some. While his brain is still fiending for that dopamine hit, he chases bad trade after bad trade. He starts trading from a place of fear and desperation. The downward spiral reduces his confidence and his bank account to pieces.
So….is a profitable trade automatically a good trade? And is a losing trade automatically a bad trade? Can we really classify trades so simply? Many newbies will use this dichotomy, but the reality is a bit more complicated.
We are so attached to the money in our account and our P&L at the end of the day that our judgment becomes biased towards focusing solely on our results. But when you start to learn and understand more about what trading is all about, you can then start to realize that the outcome of a trade does not determine whether it was the right trade to make.
To understand why this is sometimes the case, keep in mind the fact that trading is not about “being right” but about playing the odds right.
Here’s a tricky fact about trading: no one can predict an outcome on a trade for trade basis. Good traders can predict the outcome over a large number of trades, but never individually. Similarly, we know that if we flip a fair coin over a large enough number of times, the outcome will be heads about 50% of the time. The best traders leverage their knowledge, experience and strategies in order to turn the odds in their favor and get aggressive when they feel the timing is right.
So when you understand and accept that your job as a trader is not to be right, but to develop a strategy that puts the odds in your favor and trade accordingly, then some bulbs will light up in your mind:
1) You start to detach yourself from the results and focus only on what you can do to make positive results as likely as possible.
2) You understand that you can’t control the outcome of a trade.
3) You understand that you are neither wrong nor right on a trade-per-trade basis.
4) Just as the saying goes, you don’t let losses go to your heart or wins go to your head.
The bottom line is that trades should be judged on good trading fundamentals (not to be confused with fundamental analysis) and how they relate to your strategy. The question of whether you made money isn’t nearly as relevant as whether you did what you needed to do in order to maximize the odds that the trade would work out for you.
Any professional trader will tell you that sometimes the information you learn from a losing trade — like a market maker’s tactics or your own biases– can lead to exponentially more profits down the line.
The primary way to judge a trade is whether or not the trade was appropriate, given the strategy you’ve developed. In the long run, if you can’t properly identify your good and bad trades, you will most likely burn out.
You’ll know you’ve figured this out when you lose on a trade and nevertheless feel good about it, to the point that if that same trade was to show up again, you would still take it.
Days like that lead to more profits than you can imagine.
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