“Thinking In Probabilities!”

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Trading can be simple, but its not easy (to say the least)! At the very core, you “only” need two things:

1.) A trading approach with an edge;

2.) The skills to flawlessly execute that edge;

Thats it! Not much else is needed. However, anyone who actively trades knows how tough trading can be and people spend years (or their entire life) searching for their edge (most are blinded by the search for the holy grail)!
In contrast, people spend very little time and energy to develop that so important second part, the skills to FLAWLESSLY execute an edge. Thinking about myself, I believe I fall exactly in the same category as most traders. I have spent the absolute majority of my time and energy on part 1, trying to find an edge. The interesting point is, even when I was making money trading a certain approach, I quickly put it aside again (or got distracted), thinking that there must be “a better way” of trading the markets. Looking back I can clearly see that I didnt know my edge because I didnt trade a certain approach long enough to be able to even quantify it…
Although I certainly could have used my time and energy much more deliberately, I dont regret looking at various approaches. After all, I have a pretty good picture of what is out there and I feel  I have learnt a lot. Most importantly I have found a way of looking at the markets that makes total sense to me. To me the markets are an auction wether you look at it from a very macro point-of-view or you drill down to the micro levels of looking at orderflow etc. For me its all about supply and demand so I dont really care about what current moon cycle we are in or what Ganns Square of Nine is… Im not saying those things dont work, they just dont work for me because although I understand the mathematial equation behind it, I dont understand why that should have any predictive power. There are a million ways of approaching the market and I will focus on one that make sense to me!

Now going back to the subject of this post… I am a descretionary trader and I think the biggest challenge will be to remove the randomness from my trading. Please dont be misled by my words here. With randomness I dont mean that I have some sort of “shoot from the hip” approach, where I randomly enter and exit a trade. I think many people, especially those who trade algorithmic trading systems, have a wrong picture of discretionary traders. They think a descretionary trader just randomly enters and exits the market but I doubt anyone could be successful at that. Not even those who have advanced to an intuitive level of trading which is in my opinion the highest level of trading expertise one can reach, trade purely on intuition. I believe they have a pre-market plan and because of their vast amount of deliberate trading experience, they are quickly able to “get in the zone”, a state where they can extract profits from the market almost at will!
My personal challenges are that although I always (hmm, maybe not always, I should write “mostly”) :-)) have a well thought out plan, I still have too many factors that are not rigid. I know where I want to get in (the trade location) and what my risk will be but my trade management needs improvement and so does my timing for an entry. If some parts of my trading plan are not totally rigid, then there is a chance that part of my trading is random, something that I must avoid. The main reason I must avoid that is because it will be almost impossible to improve and get better. After all, even when journaling every trade, I will not know what caused an undesirable result. Was it my trade management? My timing? Did I read context wrong? An impossible task if my trading rules are not more clear cut.

I am committed  to change that once and for all even if that means to go way back and trade a very simplistic and mechanical approach where the only subjective decision making is done pre-market, when I dont have a position and thus can not (not very much) be influenced.
Mark Douglas, my favorite trading psychology resource, calls this execise “The 5 Mile Rule”. It is well explained in his superb book “Trading In The Zone” and his DVD “How to Think Like a Professional Trader”, both highly recommended.
What you do is quite simple: You take a completely rigid and tested trading approach, one where there is hardly any subjective decision making to be done and trade that in limited sample sizes of 25to 30 trades, no matter what. The purpose of this excercise is not necessarely to make money, but to learn the skill of flawless execution! My focus will therefore be on just executing my plan and fully accepting the risk. Speaking about risk, the maximum risk per trade will be 100USD in the ES, 75USD in the YM and 80USD in the NQ, trading only one contract. So hypothetically speaking, if I would only get trades in the ES (highest risk because of the 2pts/100USD stop) and all of those would be losers, I would lose 2500USD, a relatively cheap price for truly learning to think in probabilities.

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