Simple but Hard Trading Behaviors

Recently I keep thinking about these topics that relates to trading and most of them are things we hear or see them pretty often. They are very simple things that many successful traders keep talking about but they are often neglected due to the simplicity of these concepts. Yet these very simple topics have deep and important meaning behind, hence hard to really appreciate and apply.

Being someone who thinks and tries a lot, these topics starts to slowly build up their importance in my trading experiences. So I just want to write it out, clear my thoughts a little while sharing these thought process.

Plan

We keep hearing people talk about having a plan for your trade. If this is the first time you're hearing it, its not too late to start thinking about it. What exactly is having a plan. It's so easy for those successful traders just say 'have a plan', then go on sharing some of the examples they do and most of the time you still don't really know 'wtf' is the plan. So after many thoughts and tests, I kind of figured out my own understanding of it.

Having a plan means before you even think about what to do for your trade, do your analysis and craft out your condition of entry and exit. Decide what are your entry and exit plan. Another way of saying is basically doing your preparation before you go for war.

Just take an SPX intraday (0-DTE) trading for example. Before market open, I'll do some analysis to draw out some key resistance and support area. Then set some condition around these areas, e.g. if SPX moves towards this area and show signs of reversal, entry. Exit will be a stoploss via percentage of credit. This is pretty much a technical trading example. On the mechanical trading perspective, it could be something like, e.g. 2 hours after market open, enter this trade.

The main idea of having a plan is being prepared. Having all scenarios thought out and accepted before even executing. This is to ensure you are always executing in a consistent and fixed scenario.

From personal experience, I feel this 'plan' has a bit more impact on technical trading than mechanical because the condition can affect win rate much more.  

Strategy & Positive Expectancy

So having a plan itself is not enough, understanding positive expectancy is extremely important. This essentially is a statistic topic. It's basically a combination of risk reward ratio and win rate. We want to always have a positive expectancy in our strategy.

So a plan is more focused towards the preparation of the trade before execution. A strategy is more of a higher level thinking about repeating your plan everyday and whether does your strategy have an positive expectancy.

So for (simplicity sake) example if I'm doing 1 trade a day, my trading plan always aims for 1-to-3 risk reward ratio. Means if I plan that my risk is $100, every time I lose, I lose $100. every time I win, I will win $300. With that risk reward ratio, I then need to know what is my win rate in order for me to maintain positive expectancy. It'd be >25% win rate, how?

So let's do some math. Every time I lose, -100. Every time I win, +300. It means when I win once, I can afford to lose 3 times that will result in a breakeven. Which means every 4 trade, I just need to win 1. So every 4 trade win 1 = 25% win rate. Means as long as my strategy can continue to consistently show more than 25% win rate, this is a positive expectancy strategy. And so long you manage to find yourself a strategy with positive expectancy, you already have that winning strategy.

As simple as it may sound but it's really not easy to consistently maintain a positive expectancy strategy. Not forgetting slippage and fees. But mostly it's due to the next topic.

Discipline

There are actually many positive expectancy strategy around but in most cases, the strategy often didn't perform as it should due to discipline. Often relate to emotions as well.

Discipline is about sticking to your plan, sticking to your rules. It's really as simple as that. But many times there's just this smart alec inner calling that gives wonderful suggestion that result in unforeseen circumstances. Tell me this sentence sounds familiar.

"I think this will reverse later, let's remove the stoploss first."

And more often this smart alec cause huge loss on that few trades you planned out in your strategy. Then you start blaming your strategy did not work and start looking for yet another strategy. Fact is there's no perfect strategy out there, at most there's only a different strategy that fits better to each individuals character and risk appetite.

So we can see that being not discipline on your plan, will also screw up the discipline on your strategy. It becomes a snowball effect and everything become pretty messed up.

Losing

Another closely related topic to discipline and emotion is losing. The thing about losing is it affects emotions and things start to fall apart because of that. To be honest, this is not something that can be easily 'trained'. There's just so much psychological strength involved and maybe experience and numbness.

Actually once you have your strategy, plan and discipline sorted out. Losing becomes part and parcel of the numbers. You need to treat losing as something normal that MUST happen. Simply because you can never achieve 100% win rate, which makes sense right? If you know that fact that you can never get 100% win rate, then don't be influence by any losing trade.

Being affected by losing trade can also  destroy everything else. That smart alec inner calling will then miraculously appear again.

"I'll double down next trade and win back the loss"

And that's what we call - revenge trading. And you probably can guess what happened after. But the more important thing is, you then screw up your own strategy and plan. Your stats will no longer be accurate and once again you start doubting the strategy and start finding yet another perfect strategy.

That's why one of the best advise to deal with losing is to trade small. The amount you lose for each planned trade should be small enough that you don't feel the pinch so you won't be affected that much.

Curious and Greed

Curious and Greed are the reason why we keep looking for yet another strategy because the one we do doesn't seem to be working. Or even the current strategy we trading doesn't seem to be very profitable, gains are too little (greed).

The thing I've slowly start to understand is there's no 'big gains' strategy, just like there's no free lunch. As long as you have a consistent positive expectancy strategy, it's up to your discipline to scale it up accordingly without screwing up your strategy and plan.

All these are really simple things about trading we see or hear them pretty often. But how often do we really appreciate deep into them and apply them. At least these are things that makes me realise what leads to consistent and profitable trading. Maybe there are more but that's it for this post for now.

Writing it helps me sort out my thoughts better and hope it helps someone with similar journey as well.

If you agree do share this post with your trading friends, it's good to have a group like minded people reminding each other of these trading behaviors.