Trading is inherently a tough business. The reason is uncertainty in every aspect of it. Uncertainty is a trait which we humans fear. We need to know what will happen in future. Trading does not guarantee anything. A well researched trade may go against you so bad that you may start doubting yourself. A random mistake trade may turn out so good that it compensates for all the losses of the past month. One is just floating in a sea of bets. Some bets will work, most will not.
Skill & Psychology
When the nature of business is so uncertain, we need to clearly distinguish between the things within our control and things not in our control.
- Things in our control can be put into the “skill bucket”. This can be tackled and improved by reading books, talking to experienced traders, backtesting and practising.
- Things not in our control can be put into the “psychology bucket”. There is nothing we can do to change this. We need to accept it as part of business and not get demotivated when it happens. This is where trading psychology helps.
Once we clearly know what we can control and where psychology plays a role, we can understand what went right and what went wrong. This helps us define and follow the right trading process. Here comes the tough part of this business. Even if we follow the right process, the outcome of a trade could be against us. Here we need to detach ourselves from the trade and their outcome. A single trade or a small set of trades may go against us, but as per law of large numbers, if we follow the right process for too long, the overall results are bound to be in our favor.
Dilemmas every trader faces
I will discuss various dilemmas and try to categorise them into the “skill bucket” or the “psychology bucket”. I sincerely hope that this will help all the traders to analyse their trades critically and improve upon the flaws in their process. It will help them realise what factors they could influence better in their future trades and what factors are completely out of their control so no point getting demotivated over them.
Some of the dilemmas on the top of my mind are:
- I lost on this trade. It was supposed to work. What did I do wrong ?
- I lost 20% of my capital on this trade. How should I recover it ?
- The trade is in profit. Should I exit now or stay longer ?
- Black swan happened ! Whoa! I am wiped out. How to be prepared for something so unpredictable ?
- I am on a winning streak. I am an expert in this market condition. Should I increase my position size ?
- My last 10 trades made losses. Should I change my trading strategy ?
Each of the above dilemmas and more deserve a post in itself. So I will write about all of them in my upcoming posts. Follow me on twitter and subscribe to my blog to get all the latest updates.
List of Posts
Post 1 : “On winning every trade” : Link
Post 2 : “On predicting market direction” : Link
Post 3 : “On building a profitable trading strategy” : Link
Post 4 : “On discarding a trading strategy” : Link
Post 5 : “On algo trading” : Link
If you have a particular situation in mind which you wish to know more about, please let me know in the comments section or DM me on my twitter. Always in for a good trading discussion.