Thursday, September 17, 2015

Concentrate On The Big Picture

Details create the big picture.
Sanford I. Weill
When you're having a tough time of it, it is easy to get bogged down. You find yourself thinking totally about the current trade you are about to make; you desperately want it to be a winner. Instead concentrate on the big picture. Especially at times like this it's important to remember that this is merely one trade among the many you will make, and the outcome of a single trade is not relevant to the total picture of your trading account. All that is important is at the end of your accounting period, across a series of trades that you come out ahead. When you are in a slump looking at the big picture can do a lot to make you feel better, and when you're feeling better your better apt to make that trade.

BigPictureWhen you are looking at the big picture, think in terms of probabilities. Across a series of trades, if you are following a sound trading plan with sound money management and risk parameters you will need only one in three to be successful in order to be successful overall. Unfortunately when we trade we do not win one and lose two then win again. In the real world we may lose 5 in a row, then profit on 3 of the next four, then 4 of the next eight and so on. But if we are overall winning one in three we should be just fine (Review Money & Risk Management ). So maybe you've lost four in a row and the next will be number 5, but in the big picture we find we are doing just fine. In fact a very good friend of mine, we were brokers together, used to cheer out loud when he took a loss, he would say hey I'm getting closer to a big win 
In a purely mathematical sense, it isn't possible to estimate the odds that a trading strategy
is expected to produce a win, since the strategy cannot be repeated an infinite number of times under the exact same conditions. The best we can do is use historical data to see how well the trading strategy worked in the past, and assume it will work in the future when similar market conditions occur. 

Ideally, historical data should provide evidence that your strategy will give you enough of an "edge" to come out ahead. Since you never really know how well a trading strategy will work until you try it under current market conditions, it is extremely important to control risk.
Unless you control risk, then a single trade may actually be quite significant. It's a good idea however, to minimize the significance of a single trade in terms of your overall capital so that it won't hurt very badly should it go sour. By managing risk and trading high quality setups, you can more easily think in terms of probabilities. That is, a single trading outcome will actually be minimal compared to a large set of outcomes. From a purely psychological sense, think of outcomes as just one among a series. It will take some of the pressure off of you. You will not tend to think that every trade needs to be a winner, which can be very stressful, and you will be more relaxed if you look at the bigger picture.

No comments: