Do we ‘think’ too much when trading?

Dec 6 • Between the lines • 2106 Views • Comments Off on Do we ‘think’ too much when trading?

shutterstock_137841803“Don’t think just do” is a phrase often delivered by sports coaches. The implicit suggestion is that on a sports field, during the ‘heat of battle’, it’s often our instincts that we need to be governed by and not any cerebral motivation or stimulation. The athlete is prepared, primed and in a position to react. His or her muscles (together with the right mind set) are conditioned to react without thinking. After the hours, weeks and months of training on the sports field, the athlete doesn’t think, they just do, as they have absolute confidence in the outcome…

We see this theory played out in sports such as football constantly; a world class striker will instinctively be in the right position to score, and when the chance is presented to him the striker takes his shot, without fear or hesitation. All those hours of practice on the field and all the hours of coaching (both physical and mental) from his coaches pay off as he finds the back of the net.  And we shouldn’t underestimate how much practice goes into making that striker deadly in front of goal, he’s become conditioned robotically, through repetition, to have no fear in front of goal, the opportunity arises and he pulls that trigger…

Putting the ball in the back of the net

On the subject of football there’s some interesting stats regarding football strikers in particular; roughly half of their attempts at goal (when on target) fail to find the net. Also they’ll miss the target regularly. The rough rule of thumb is that only one in 3 shots at the goal result in a goal and that’s for international class or world class strikers, not amateur players. Isn’t it remarkable how this strike rate is similar to our experiences as traders?

If we take 100 trades (shots) 33 might be winners at our full expectation (goals), overall 50 reach breakeven or are winners (they’re on target) and circa 50% are losers (misses). That 50:50 percent strike rate is remarkably similar to the rates a successful trader might enjoy; 50 percent of our trades won’t be winners, but 50% will be on target and perhaps a third will be profitable at the full edge of our expectations. This kind of performance is often the model pointed at for consistent returns in trading; we only need fifty percent of trades not to lose in order to win overall. Now back to our athlete and their conditioning, let’s consider our ‘trader athlete’ and their conditioning…

The move from demo to real is never as smooth as we hope it’ll be

The advice often given to new traders is to practice on demo accounts in order to become proficient and profitable. Once our trader’s strategy is proving to be profitable (consistently) the advice is to then move onto real trading. As part of the conditioning that our trader will have undergone ‘on demo’, the trader will have self-imposed their own code; when their trade set up occurs they’re conditioned to act upon that opportunity without hesitation. They’ll have practiced it (what to do when the opportunity presents itself) countless times through their demo account and simply clicked the order once the opportunity becomes available. Time after time our trader unconsciously clicks the order on their screen, as a consequence they now feel ready to step up to real trading and this is where things begin to fall apart. It’s this aspect; of moving from demo to real and not being able to act without fear and hesitation, that we want to concentrate on and potentially offer up remedies as a cure for hesitation.

Real money equals reality biting

Without a doubt the leap from simulation to reality is a far greater challenge than most imagine it will be and there’s a little known reason why this is so and it has nothing to do with the reality of trading real cash versus simulated trading dollars. For our trader to feel confident (to make that move to trading real money) they’ve probably (the key word) just enjoyed a series of wins, which has underpinned their confidence, encouraging them to now finally take the step up to real trading.

As sure as night follows day, after enjoying a series of wins and feeling confident and ready, those probabilities come back to haunt us. The last ten trades’ in demo saw perhaps 6 wins, four losses, with the last three wins being in series. Therefore our trader feels ready to go based on the optimism the last few trades have generated. Then as they move up to real trading, as per probability distribution, they might suffer 2 losses, then 1 win, then 2 more losses, suddenly they’ve experienced 4 losses out of the five trades. Panic sets in as they close either winning or losing trades too early, therefore compromising the probability distribution that is at the heart of any successful trader’s overall strategy. The trader’s step up from simulation to real is now ruined and they immediately sink back to the comfort of demo trading where, once again, they begin to experience a few winners. Then all the previous doubts begin to occur again with regards to their system and their overall competency to trade the markets before they consider attempting real trading again, our trader might now actually develop the ‘jitters’ on demo.

So how can we make our “don’t think just do” concept work in our favour, what ‘code’ can we install in our programme and overall trading plan to ensure that when our set up occurs we manually click the order without hesitation? Preparation is everything…

Fail to prepare then prepare to fail

In order to make our reaction automatic, when our high probability set up occurs, we must have absolute faith in our trading plan. One mistake new traders continually make, once convinced their plan is bulletproof, is risking too much of their original account once they move from demo to real trading, one suggestion is to halve the original risk our trader has allowed for.

If the trader has €10,000 they should half it to €5,000. And rather than risk two percent of the account per trade only risk 0.5% for a short period of time and set out the drawdown limit. The impact this can have on our peace of mind and therefore our confidence to “do and not think” can be quite substantial. In many ways this kind of strategy can play tricks on our subconscious. We’re removing impatience and lowering our stress levels substantially. Extending this ‘tricks on the mind’ concept we’re also conditioning ourselves to accept that there’s another major step between demo accounts and real; a micro account (within our trading account) and micro  accounts are perfect for this eventuality.

Risking less of our overall account, risking less per trade of that reduced account, realizing that the move from simulated demo accounts to full account trading is too big a step, will ensure that our trader is conditioning themselves to behave like a world class striker when the opportunity presents itself.

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