How I Learned to Stop Worrying

I'm pretty sure that anybody who has ever placed a trade in the markets knows the feeling that as soon as your money is on the line you feel a certain tension and want to watch how your trade is doing. You did all your homework, double-checked the essential and bonus factors for the setup and you feel confident that this trade definitely has to be a winner. How can it not be? Unfortunately the market doesn't agree. Take several of these occurrences in a row and your mental game may be seriously challenged.

How can we overcome this challenge of "winner expectation"? I think we have three steps to consider. Step one is having a proven and solid trading strategy as your foundation for trading. Step two is realizing that all your trades are independent from each other. If you approach your trades from a slightly different mental angle on top of it as a third step, your mental game might become so much easier.

A Proven Strategy

For every item on our trade setup checklists that we can mark as being present, probabilities of success increase significantly. So in the end a long list of advantageous factors should shift the win rate from a purely random 50-50 in our favour. Thanks to our money management and stop/target/scaling strategies we should also be able to win more than we lose. Both factors should shift the statistical expectancy in our favour and given a high enough number of trades we do know that our trading should be successful.

Independent Events

Unfortunately this scientific foundation will likely be of little comfort once the next streak of losing trades hit you. Now you have to keep one thing in mind that all your trades are completely independent events. This means that the result of your previous trade has no relation whatsoever to your next trade. Just because you had X losing trades in a row doesn't change the probability of trade X+1 being a winner. This is a very common misunderstanding. Casinos are heavily cashing in on this misconception by showing the history of "red/black" results at the roulette tables. After several "reds" people are usually betting heavily on "black" being the next colour. They fail to see that every throw of the ball is an independent statistical event. The very same is true for your trades, they are independent statistical events and the probability of any one of them being a winner is always the same - the win rate from your proven strategy. So having several losers (or winners but we won't be complaining about these) in a row is perfectly fine and is no indication that you did something wrong or your system is broken. So how can we cope with this situation from a mental perspective?

A Different Angle

I usually have some kind of trading book sitting on my desk or next to my bed all the time. I feel that there is always something to be learned, even if it's often just validation or a variation of an already known concept or a slightly different take on it. In one of my books I read this particular sentence, which made my trading life so much easier from a psychological perspective. The magic sentence was "Never expect any one single trade to work". Then it clicked with me, I do know that the odds are in my favour. I do know that I should come out ahead in the long run. But it doesn't have to be this one trade. I even expect it to fail, against all odds of the win rate. I embrace the opportunity to use it as a reference setup during my weekly review session and see what I might be able to learn from it for my future trading. This slightly different angle on my personal expectation management allowed me to move from a very involved mental state to a more neutral and observant position. Not being emotionally involved is a very important part of the successful trader's mindset. This simple concept helped me to get closer to this state. Never expect any one single trade to work. Just don't complain about winners.

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• Tuesday 30th June 2015 @ 8pm London, 3pm New York, 5am Sydney (next day), 7am Auckland (next Day)

Regards,

Philipp Pfitzenmaier

The TWP Team