I don’t know about you, but I absolutely love leaving my desk at the end of the day in the green.
It’s a great feeling to have had a profitable day, and more so if you followed your trading plan perfectly. These are the days you know you have made it as a professional trader because the profits come easily and your confidence swells as you are in total control of your actions. This confidence leads to better trading habits and more profits, and as good habits compound over the weeks, months, and years, one day without realizing it you will have turned into a consistently profitable professional trader where trading becomes simpler.
This unfortunately though is not an easy place to get to.
Most traders end the day deep in the red, angry, and frustrated beyond belief at another losing day due to mindless actions taken by the trader himself. Only after the loss has been booked does the trader realize his mistakes and vows not to repeat them only to replicate the self-destructive behavior soon again.
So, why are most traders stuck in this doom spiral of losses and terrible feelings of shame, fear, and guilt?
I know because I was the king of everything I just described above.
I did not have a trading plan.
I did not realize trading is a probability-based business.
And I was overcome with fear when in a trade letting my losses get big but cutting my profits the moment I was in the green.
This fear, which holds most traders back is what I what to unpack today:
The primary reason you are afraid when in a trade is because you are operating in an uncertain environment. The human brain cannot function properly in uncertainty and every tick against your position gradually makes you uncomfortable. Your thoughts run amok and your stomach is in knots as your position gets away from you, and the loss starts getting bigger. Before you know it, you do something idiotic and have lost 25% of your account…in one trade!
So, what is the cure for this ailment that affects losing traders?
You, the inconsistent trader must understand and accept TRADING IS PROBABILITY BASED. Any trade you put on will have a probable outcome, it could win but it could also lose, and you must be okay with that. Any trade you put on is a random outcome, so how can you be emotionally attached or be upset by a random event? You literally have no control of what is going to happen. Sure, it would be nice to win on every trade but to the contrary, 60% of your trades if you are lucky will lose money, for most traders the loss percentage of trades will be above 70% or even higher.
The reason it is hard to take a loss is because the trading loss associates with every other loss we have taken in the past in our lives, be it continuous trading losses or losses in relationships, professional environments, or other social places. Losing money is especially hard because we have financial responsibilities and obligations. But in trading we must take the small loss before it turns into a big one that severely affects our ability to continue to trade.
Because trading is probability based then we need to have some sort of a system to protect our account from losses. This is where R:R - RISK:REWARD - comes in. If R:R is not part of your trading then I’m sorry to say you don’t know how to trade, this should be the foundation of your trading plan. Any trade you put on must be calculated with R:R before you buy or short the market.
All of my trades go off at 1:3 R:R, meaning I risk 1 to make 3 reward, so for every $1 I risk in the market I look to make $3 from a winning trade. So, your risk can be $100, $500 $1000 or any amount your account can handle, but your reward has to be $300, $1500 or $3000 to correspond with the risk which is 3 times the return of your losing trades 1:3.
Now if all of your trades are going off at 1:3 all you need to do is win on only 30% of your trades and you will make money consistently long term.
Say you have 7 losers at R1 that is $7 lost but you have 3 winners at R3 that is $9 won. You are ahead $2 in total because of R:R.
Even while making money only on 30% of your trades you will still make money consistently if you understand the R:R concept and apply it diligently to all of your trades going forward.
You have to keep your trading simple. Simplicity will allow you to focus deeply on what is important in front of you on the chart. Lay off the indicators and gurus on twitter. Focus on trading a simple plan with R:R as your foundation of trading and before you know it you will be making money consistently as a professional trader.