In this series titled Trading Truths To Learn Or Liquidate By, we hear from Patrick Munnelly, head of Prop Trading at Littlefishfx.com.
#3: False Goals & Trading Process
The latest instalment of Trading Truths discusses the importance of developing a trading plan that will not simply deliver success in the short-term, but will prove to be a profitable and consistent strategy long into the future...
There are times in life when we are better off failing, even if it is more painful near term: shoplifting, betting £100 a hand in blackjack, making advances to our bosses wife. Getting away with these things temporarily would lead to worse outcomes in the longer termPatrick Munnelly
The Importance Of Correct Decisions
While all traders like their trades to be winners, it is important for the aspiring career trader to grasp the essential trading truth of winning over the long term. The challenge of the career trader is developing a trading history that includes both winners and losers with the winners ultimately dominating the results.
One of the major challenges to building a successful trading career is winning in the near term with a trading strategy that doesn’t have the potential or ability to delver results over the long term.
The career trader must understand that the goal of trading isn’t to win money it is to trade well adhering to your plan and executing your plan continuously and consistently. Less experienced traders believe that the ultimate goal of trading is to make money, when, in fact, the actual goal of trading is to make correct decisions. If the aspiring trader can focus on this, the rest will follow
The notion of winning money is a false goal, the trick is to put your focus on how you are trading, not whether you are winning. You can actually be trading very poorly in the near term but be making money. However this near-term success doesn’t portend the victory you envisage as ultimately the poor trading will catch up with you. While it might be momentarily pleasing to catch a winning streak, it is self-defeating if these gains are achieved by poor trading practice. The better outcome would be to lose when trading poorly as this would help steer us to the correct path and decision process.
Money as the guide to trading skill is actually pretty unreliable. Suppose you are up in your current days P&L by £200. Going by that number alone you would surmise that the session is progressing well, but the disciplined trader adhering to his plan and making correct decisions over the same session could be up £600 - this is indicative of the fact that money alone does not measure good trading.
The career trader should end a session up £250 proud of the way they have traded through the session, while there may be another session where you are up £300 but disgusted with the way you are trading. For the career trader, it is the process of trading correctly that must remain the overriding objective as it is this that will ultimately deliver long-term success. It is important to congratulate yourself for every correct decision you make, not every trade that wins.
By way of illustration, suppose you have entered a trade as per your trading plan, but the price has moved adversely against your position and your protective stop is in peril; in this instance you move your stop and price reverses and you end up with a winning trade. While in the near term this is satisfying, the act of continuously moving your pre-planned stop and deviating from your trading plan is self-defeating and can only lead to long-term demise. Now the trader who avoids moving their stop and accepts the loss moving on to the next trade - while losing in the short term - is actually beating the game over the long run.
Trading Process Is More Important Than Outcomes
It is common for less experienced traders to live and die with each trading outcome, a loss being a personal affront. But the affront should be created only by deviation from your trading plan, as it is the leak from this deviation from your trading plan that is where the money will seep from your account over the long run. The trading truth that is difficult for the less experienced trader to appreciate is that if we trade poorly we should want to lose.
There are times in life when we are better off failing, even if it is more painful near term: shoplifting, betting £100 a hand in blackjack, making advances to our bosses wife. Getting away with these things temporarily would lead to worse outcomes in the longer term. We need incorrect decisions to have bad consequences. We shouldn’t want to be insulated from our mistakes, for it is these that will guide us to make correct decisions in the long run that we ultimately benefit from.
The career trader must embrace the concept of trading correctly, adhering to their plan without near-term reward. This will often mean experiencing periods of draw downs and accepting them as part of the process knowing that these will pass and that it's the adherence to the trading plan and consistent correct decisions that will deliver the success we strive for.