Why trying to be a straight A trader won’t get you to the head of the class

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Just to reiterate, this is not investment advice.  I’m only sharing what I’m doing personally, which doesn’t mean you should invest or trade like I do.  Please read the disclaimer below.

In the midst of the current trading drawdown that I’m experiencing, I’ve been spending a lot of time learning more about the appropriate mindset of a trader as well as really investigating my own psychology.

The more I’ve learned, the more I realize that successful trading is just a mental battle with yourself.  And to be successful at trading, you have to think completely differently to what is generally taught in society.

Successful trading is completely counterintuitive, and without fully understanding the dynamics of market participants as well as really taking stock of your own psychology, it will be very challenging to develop the traits necessary to be successful at it.

I just finished reading Trading in the Zone by Mark Douglas, and he does a beautiful job of describing the individual trader’s psychology as well as the psychological attributes an individual can have that may make them successful in society, but that those qualities are the same qualities that may make them horrible traders.

He talks about learning to think in terms of probabilities.  Basically, there’s no way to know whether one individual trade is going to be a winner or a loser.  But over a large series of trades, overall results become much more predictable.

One thing he talked about that really resonated with me is the part of human nature that wants to be right.  And why this desire to be right interferes with trading successfully.

If you follow most trend traders or read anything about them it may surprise most newbies to learn that successful traders (the ones who are successful over a long period of time) actually have more losing than winning trades, yet they still profit over the long-term (even when going through nasty drawdown periods).

In Trading in the Zone, Mark Douglas writes:

“There is a random distribution between wins and losses for any given set of variables that define an edge. In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. What you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. When you really believe that trading is simply a probability game, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.”

This is where the counterintuitive part comes in and what most newer traders don’t take the time to really understand.  Losing trades, for most people, trigger emotional pain.  Maybe it’s the emotional pain of getting wrong answers on a test and losing points as a result.  We’re conditioned by society to have a high win rate, because if we don’t we’re all a bunch of failures, right?

I’ve thought alot about this lately in relation to the way I was brought up.  Up until I got to university, I was always among the top students in my class and got among the highest grades – but not the highest.  I graduated 2nd in my class from high school – in fact, I never once topped my class in any quarter, no matter how much I tried.  There were always some tests where I got enough wrong answers to put me in 2nd, not 1st.  Don’t get me wrong – at this stage in my life I could care less about high school, but I can still remember how trying and not being able to beat the top person in my class even once was a blow to my ego.

You go to school and get programmed that the best students get the best grades because they get the most answers right on tests.  The students with the lowest scores get labeled as failures.

If you’re reading this right now and you happen to be a new trader who’s ever been an achiever, having a low win rate in trading is going to bring up a lot of the same emotions you felt whenever you missed at something.  A string of 10 losing trades in a row may bring up the emotional pain of getting bad grades or whatever other trigger.

So when you get to trading and discover that you can be highly profitable without a high win rate, it’s going to sound strange. You’re still going to want a high win rate on trades because psychologically, it’s what you understand and what feels good.

Let me be the one to share with you that the markets may be the one place where the having a high win rate won’t put you ahead of the class.

Focus on thoroughly understanding your trading strategy, whatever it is, if you truly want to be successful at trading.  Learn to think in terms of probabilities.  For all you know, your next 10 trades might be total losers, or they might be monstrously profitable.  Trying to be right in the markets is the undoing of most new traders.

Focus on managing your risk so that no one trade will wipe you out.  Trading is not like school, you won’t win any prizes for trying to be right all the time.

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