Are You Cutting Your Winners Short by Trying to be Right?
Good trading is a curious mix between taking profits when the market makes them available, and letting profits run to capture big wins.
The problem is that, more often than not, this decision is dictated by emotion rather than reason.
Instead of trusting the statistics behind our edge, we focus on trying to be right on our current position.
Trading is a statistical game
Top traders know their probabilities. They recognise that no matter the quality of their analysis, once they have entered their position, it may or may not go for them.
If they start to second-guess which ones will go and which won’t, then chances are they will cut themselves out of some winners and degrade their system in the process.
Understand the move you are looking to capture
One of the first things to do when developing a system is to get very clear on the moves you are looking to capture.
Once you have identified the types of opportunities you are looking for, you can create a “rule-based” plan to capture those moves with the best risk/reward possible.
You should garner an understanding of how often the moves occur, how long they typically last, and how big the pullbacks can get.
How the need to be “right” manifests itself when exiting
There are three main ways that trying to be right interferes with our exits. This can happen both in the system development phase, and when trading live.
I’m sure there are several other ways this bias appears in our trading, so remain self-aware.
Journal your interference
Perhaps you are a guru with the skill to know exactly when to get out of your positions.
How to tell?
Make sure you mark in your journal any discretionary exit decisions you make. That way, you can track how well they compare to a “rules-based” approach.
Alternatively, you can allow yourself a small percentage of the position to add and remove at will. By increasing our options this way, we feel good about being right, while still letting our profits run on the majority of the trade.
Good Luck!
The problem is that, more often than not, this decision is dictated by emotion rather than reason.
Instead of trusting the statistics behind our edge, we focus on trying to be right on our current position.
Trading is a statistical game
Top traders know their probabilities. They recognise that no matter the quality of their analysis, once they have entered their position, it may or may not go for them.
If they start to second-guess which ones will go and which won’t, then chances are they will cut themselves out of some winners and degrade their system in the process.
Understand the move you are looking to capture
One of the first things to do when developing a system is to get very clear on the moves you are looking to capture.
Once you have identified the types of opportunities you are looking for, you can create a “rule-based” plan to capture those moves with the best risk/reward possible.
You should garner an understanding of how often the moves occur, how long they typically last, and how big the pullbacks can get.
How the need to be “right” manifests itself when exiting
There are three main ways that trying to be right interferes with our exits. This can happen both in the system development phase, and when trading live.
- We take profit without a clear exit signal. Be cautious not to take profit just because the market has gone your way. Wait for your pre-determined exit signals, or wait for your objective to be hit.
- We trail our stop-loss too tightly. Currency moves can require wide stops, so give the trade room to breathe. It’s no fun being whipsawed out of a trend because of your fear that it might end. Wait for the trade to be well in your favour before trailing your stop.
- Moving the stop to breakeven. A breakeven stop can be a good thing. However, if you find you are getting stopped out of winning trades because you have quickly moved your stop to breakeven, then perhaps it is not serving the best purpose.
I’m sure there are several other ways this bias appears in our trading, so remain self-aware.
Journal your interference
Perhaps you are a guru with the skill to know exactly when to get out of your positions.
How to tell?
Make sure you mark in your journal any discretionary exit decisions you make. That way, you can track how well they compare to a “rules-based” approach.
Alternatively, you can allow yourself a small percentage of the position to add and remove at will. By increasing our options this way, we feel good about being right, while still letting our profits run on the majority of the trade.
Good Luck!
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