Wednesday, October 31, 2012

Stick to Your Plan

Sticking to your plan is crucial, especially when you encounter a losing streak. Often, losing 3 trades in a row would result in a great deal of emotional pain and thus result in a state that puts you out of the flow of the market. Unless you have learn how to accept losses and not be affected by losses, it is likely you will carry on to take trades that were either not planned or were not properly executed.

Personally, I have learn to accept losses completely and thus do not feel any emotional pain. If you have not already done that, sticking to your plan would be the short term remedy for it.

Sticking to your plan regardless of whether your past trade is crucial because each trade is independent on the previous one. Just because the previous 3 trades were losers does not increase or decrease the probability of the next trade that you are going to take. This means that you should carry on sticking to your plan and executing them as planned instead of temporarily avoiding the market due to emotional pain.

Think of trading as a casino with an edge over any gambler. The only way the casino is able to be profitable is to ensure that it has a large enough sample size to give its edge ample opportunities to act out.

Suppose your trading system have a win rate of 70%. This would mean that 7 out of 10 trades would be winners, with 3 losing trades. Now consider a sample size of 30 trades with the following outcome:


What would happen if you simply stop at the first 3 trades because it was a good but not profitable trade? What would happen to your equity curve? More importantly, how would you feel if you realize the next few trades you planned were big winners?

Bottom Line:

Plan Your Trade, Trade Your Plan

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