Uncertainty – Doubt – Fear – Loss

Most traders fall into 2 main categories of emotional bias when trading, either FEAR or GREED. In this post I want to focus in on FEAR. When trading the Hard Right Edge without any plan or structure around your trading endeavours inevitably leads to losses and then FEAR of losing more money, otherwise known as ‘Recency’, where your trading decisions are affected by your recent past track record.

A past client of mine contacted me recently for help because despite having a track record of profitability he had started to experience a losing streak and was watching his hard earned Capital slowly ebb away towards his initial investment amount. This is a precis of some of the things I messaged to him on Skype……

He was clearly suffering from Recency. Although I knew the answer, I asked him if he had a proven ‘Edge’, had he back tested and then traded live the strategies he was using and that I had taught him. He replied a resounding YES!

If you haven’t proved to yourself that you actually have an edge with your chosen strategy then stop trading live and go and back and test it – Tip: use this software:

Back Testing Software

He then sent me his myfxbook link so that I could see his Equity Curve and associated Stats and we talked through them. I sent him my Stats and Equity Curve of my first Live trading account and we discussed those, pointing out that despite only having winning trades 40% of the time my Profit Factor was well over 1 and my Equity Curve was rising throughout with only minimal draw down in the most part. Why was this the case? Was I a trading genius? NO! The answer lies in several factors, firstly I trusted my fully tested strategies, secondly I was using Robust Risk & Money Management including Stops, thirdly I was taking trades where my Reward was at least twice as big as my Risk and lastly I was only risking 1% of my trading capital on any trade.

I then established that he was also doing the same, so far so good.

The next thing we discussed was what a proven ‘Edge’ actually was. In short, it is a proven strategy and trading process that is profitable over a number of trades, where that number is ideally at least 100 or more. Inside that trade sample will be winning and losing trades and some of the winning trades and some of the losing trades will be sequential. Meaning that you will have winning periods and losing periods but you still have a proven Edge, provided you stick to your proven trading process/strategy, plan your trade and then trade your plan and don’t break the rules! Understanding this is important, especially if your are to maintain your mental fortitude and trading mindset over a large sample of trades.

Additionally, the probability of success or failure of each trade, provided that you are sticking to the proven process/strategy, is independent or discrete compared to the previous trade(s) and indeed the next one(s). Understanding that is also important to your trading mindset too!

In summary, Uncertainty leads to Doubt which leads to Fear which leads to Losses. if you create structure as above, around a proven strategy/system and understand the probabilities at work, are patient and disciplined, you will come through losing periods and continue to be profitable. You are in effect ‘Managing Uncertainty’ when trading the ‘Hard Right Edge’ and controlling your FEAR!

I’m pleased to say that within a few days of this exchange my former client has turned his loss making streak around and his equity curve has begun to rise again. and I should say due to his efforts not mine.

Top Trading Tip: Know your Edge and Stats over a significant number of trade samples. Stick to the Rules and the Process, utilise Robust Risk and Money Management including Stops. Create structure around your trading in order to manage uncertainty and understand the probabilities involved whilst exercising Patience and Discipline. This should prevent FEAR and Recency from scuppering your trading endeavours.

If you need help with your trading, even if starting from scratch, then give some consideration to getting some education, coaching and mentoring here.