A mini-rant on this little excerpt from a trading book that I’m reading on price action. I’d shared this in my Discord server earlier, but thought I’d share it here too…
I’ve spoken to a few new traders in the past weeks and they all remind me of a strategy-related mistake I used to make frequently (and still make, albeit a little less now).
Even if you’re a discretionary trader, having a well-thought-of position size & risk strategy is the single most important thing you can do. Yet despite that, many focus more on which indicators are better to use. Everyone does that, it’s the natural progression I believe.
Without a sound strategy, trading outcomes can be worse than flipping coins.
The fact of the matter is that no indicator is certain. No reward is certain. The only thing certain is ‘risk’. Similarly, as retail traders, our trades will never control the market. But we can control our position size, entries and exits.
And given how the market works in probabilities, we can never look at the outcome of just a few trades and conclude that it works or doesn’t work. We should try and stick to the process consistently and understand whether it works over a larger number of trades.
As difficult as it may sound, discarding a strategy because it’s given losses a few times can be terrible. If a certain setup’s POP (probability of profit) is 70%, understand that it can give 30 loss-making trades out of 100! So why judge its outcome after just a few?
If we feel the testing phase has reached a point where we can’t afford any more drawdowns, even paper trading or reducing size would work. But without testing with enough data and with enough trades, we may be poorly equipped even if the strategy works initially.
Human psychology & emotions can make or break this seemingly simple process. For instance, if we see green in our P&L, we’re subconsciously more likely to feel the strategy works & stick to it. If we see a loss in the first couple of tries, we can have an inherent negative bias.
The past few months have been filled with similar trials & errors for me and sticking to a process even if it doesn’t work can be the most challenging bit. But I guess that’s just trading…
-KR
—————————-
Want to learn more about the stock markets? Check out my Basics of Stock Market’s playlist on the Stock Markets With KR YouTube channel. All my content is free and it’s the stuff that I actually use.