This Week's Question: When Do You Consider a Trade "Successful"?

Trading Discussion
21

Allow me to just clarify something using the age-old coin flip as an example:

Imagine we are using a fair coin and you have got a 50% chance of correctly guessing heads or tails on each flip.

On a losing flip, you lose a dollar. On a winning flip, you make a dollar.

In this scenario your long-term expectation is breakeven.

It would therefore be irrational to celebrate individual winning flips, just the same as it would be irrational to lament individual losing flips, knowing that your long-term expected return is breakeven. No need to strap yourself to an emotional roller-coaster, just trust the statistics and you’re going to get to breakeven over the long run regardless of any streaks you encounter along the way.

However, as traders we want to make some profits. As other people have pointed out here, ultimately we are in this for the money, right?

To make money over the long-term we first need an edge, that’s a whole other thread, but for the purposes of simplicity let’s think of our edge as an accurately estimated win rate coupled with a suitable risk to reward ratio.

So, with that in mind, let’s now imagine some new rules:

This time on a losing flip, you still lose a dollar but on a winning flip, you win two dollars.

You’ve now got a 50% win rate coupled with a 1:2 risk to reward ratio.

Guess what, my friends?

You just entered the profit zone!

There’s just one thing . . .

It doesn’t mean every trade you make is going to be profitable.

Nor does it mean you’re going to make a profit every day, every week or even every month.

You might, you might not.

Still, no need to worry because, as we saw from the breakeven example above, there is no point putting ourselves on an emotional roller-coaster knowing that in the long-run we are going to make money regardless of the inevitable wins and losses along the way.

Your success as a trader has little to do with individual wins or losses and everything to do with meta factors such as how sharp your edge really is and how well you followed your trading plan.

For this reason, and according to simple maths and logic, the monetary result of individual trades is largely irrelevant.

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22

Personally, I prefer to rely on my own analysis when making trades, even if it results in losses. While using suggestions from others can be helpful, I believe it’s important to develop my own skills and strategies. If a trade based on my analysis results in profit, that’s a great feeling. And if I experience losses, I use it as a learning opportunity and take notes to improve for future trades. Ultimately, executing trades independently and successfully based on my own ideas is the most rewarding outcome.

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23

You know, for me, a trade is only successful if I’ve followed my strategy and made a profit. If I make money but didn’t stick to my plan, then it’s not really a win cause I didn’t do what I was supposed to. And if I followed my strategy but didn’t make any cash, then that’s a fail too cause the whole point is to make some money, Isn’t it?

24

As I outlined above, it is illogical to judge your results on the outcome of a given trade.

This is not a grey area. It is simple maths and logic.

The problem is people struggle with probabilistic reasoning, even when it is spelt out for them. Actually, it is probably one of the main reasons that new and aspiring traders struggle to make consistent profits.

Think about it like this: A casino doesn’t mind if a gambler brings a thousand bucks to the roulette table and ends up walking away with ten thousand bucks.

Why is that?

Because, ultimately, the casino has an insurmountable edge on the roulette wheel and they realise something that the gambler doesn’t: it’s all one long session. Eventually, their edge will win the day and the gambler will give back all his ‘profits’ and some.

A profitable trader with an edge in the market is in the same fortuitous position as the casino.

It simply doesn’t matter how individual trades pan out. Not even slightly.

With a proven edge and good risk management, you will extract consistent profits from the market over the long-term regardless of what happens in the short-term.

Without an edge, you will lose money over the long-term regardless of occasional wins along the way.

It really is as simple as that!

25

The casinos’ advantage, known as the “house edge,” is a notable aspect of the gaming experience. However, its significance is often overly overrated. This built-in advantage ensures that casinos profit over time, but the real reason players tend to lose money in the long run extends beyond this inherent edge.

A trader’s ability to handle the vicissitudes of life and maintain emotional stability, even in challenging circumstances, is the key determinant of their success or failure in Financial Spread Betting. Life’s unpredictable nature can generate stress that significantly impacts decision-making processes during trading.

The combination of stress, impulsiveness, and life’s uncertainties can create a domino effect, leading to rapid and devastating losses. When traders fail to manage their emotions and make rational decisions, they may take excessive risks, bet beyond their means, or make impulsive choices based on short-term outcomes. This chain reaction can quickly snowball out of control, resulting in financial and emotional chaos.

Much like a volcanic eruption, a SINGLE poor decision can lead to the complete decimation of a trader’s bankroll. The repercussions of such a choice can be far-reaching, affecting not only their financial stability but also their mental well-being and relationships with others.

This emphasizes the importance of effectively managing stress and emotions while trading. Traders who can maintain a level head, regardless of the situation, are more likely to make better decisions and avoid catastrophic losses. Developing emotional resilience and coping strategies can help traders navigate the challenges and uncertainties that come with trading.

In conclusion, the house edge in casino games or uncertainties in forex trading do contribute to the outcomes, it is often OVERLY overrated as the primary factor in a trader’s long-term success or failure. Embracing a healthy attitude towards trading (gambling), setting limits, and practicing emotional regulation can significantly improve a trader’s chances of success in the world of Financial Spread Betting.

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26

Whilst I agree that there are other reasons that contribute to a gambler’s long-term losses, the house edge is certainly not overrated. If anything, it isn’t discussed enough when it comes to trading. Most people don’t really grasp the importance of having an edge, that’s why there isn’t more content around the subject. It’s far easier to gear content towards vague subjects like psychology and lifestyle.

I firmly believe that your edge is the single most important factor determining your long-term profitability. Furthermore, the average newbie doesn’t even understand what an edge really is let alone how to start actually building one.

As for the psychology of trading and the emotional turmoil traders are susceptible to, as I have said elsewhere, I think it’s all nonsense, I really do.

In a calm, rational state of mind I build a trading plan that includes predefined maximum drawdown limits and a schedule of ongoing reviews of the particular strategy that I am using.

I then stick to that plan no matter what.

I don’t have to rethink anything, it’s all there in the plan, so I am insulated from thinking errors and cognitive biases.

There is no need for me to become emotional about any given trade or result because I have already tested my strategy and written a thorough plan with plenty of checks and balances built in.

Psychology and emotions simply don’t factor in my success.

I know my strategy works over the long-term even though I can’t guarantee the success of any particular trade.

The only thing that is important is whether I am right and I actually have an edge. If I do, I’ll make money over the long-term. If I don’t, I’ll lose money. It’s as simple as that.

Now, I appreciate that the most difficult part for many people, assuming they could develop a winning strategy and write a comprehensive trading plan, might be actually sticking to their plan.

However, that is not a psychological or emotional-based problem, it’s a self-discipline problem.

Ultimately, I agree with you that there are a number of factors that contribute towards the high failure rates in trading, psychology and emotions being among them for some traders.

However, if you don’t really have an edge, you’re going to lose over the long-term regardless of how strong your psychology is or how well you are emotionally balanced.

That’s not just my opinion, it’s a mathematical fact.

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27

You’ll consider a trade successful when you take a trade based on your trading plan and it hits your take profit objective without being stopped out.

29

When you know why you won or lost a trade.

30

For a trader to be considered successful
He/she should be able to identify a good asset with detailing, identification of profitable risk, patience and strategic discipline

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