Trading Psychology 101 - You Holding on For a Round Trip Makes Market Structure

Have you ever got into a position, thought to yourself, "Yeah!  The market is totally going to continue in the direction that I see it going in."

**Crystal Ball reading + predictive capabilities intensify**

Then...

Price returns right back to your entry, and goes beyond it.  "No big deal, will totally keep continuing and my idea is amazing."  Then it doesn't, it gets further away from your entry, and may come back around near it to tease you.  Instead of acting rationally and either 1) having a stop loss in place at a reasonable target (but you skipped that because you are so confident in your idea that you put in a little to much leverage, but not enough to be in danger of being liquidated soon) and 2) just cutting the position that is revealing itself quite obviously, as a loser.

But you're no loser, are you?  No.  Not you.  (And most certainly, not I.)

Definitely not a loser, and certainly not a quitter!  Right?

Well - of course that completely inverts the correct, winning mindset in trading.  (If you could not tell, this is dripping in self-deprecation and sarcasm because I'm just a human animal trying to make it in the markets like everyone else.)

Tom Hougaard is famous for not just being a massively successful high-stakes trader, but for writing the perennial book on trading psychology, "Best Loser Wins."

The ability to take an L and maintain your buoyancy and resilience is what is going to carry you into success.  In my last post I had talked about how the best fix for trading psychology is to have a bulletproof system.  That is not to suggest that the system will produce winning trades with 100% accuracy each and every time.  No, no.  A bulletproof system allows you to engage with probabilities in such a way that you can take the L knowing that your winners are going to pay for the cost of doing business, which are the fees for opening + closing + holding your positions.  (Did you forget to factor in fees?)  Yes, that includes factoring in taking a loss.

May I present to you, an equity curve simulation calculator?

Try for yourself here

This is a pretty vanilla equity curve - reasonable R:R ratio, $1000 of starting capital, and 500 trades with a 50% win rate.  In this particular calculated scenario, you're still going to have a maximum drawdown of 11.4% and take 9 consecutive losses.

The system you marry yourself to is going to help you ride out the grueling psychological agony of losing x9 in a row, and keep you level during the euphoria of the winning x12 in a row, to get you to the place where you are enjoying the 235.2% increase to your portfolio balance.

Great - stats are wonderful, what does this have to do with staying in a losing position for too long?

So glad that you asked.

Holding on to your losing position is evident that you do not put 100% faith into your system and are second guessing it, preferring your "intuition" (let's be real here -it's bias in this instance) over your mechanical system that removes guessing.

What ends up happening is that your shitty position that has you trapped gets you wound up in the psychology of a trapped trader.  Holding on to the crap position, which is costing you the opportunity of getting into a better position that aligns more tightly with your entry criteria.  In some of my previous experiences, holding on for literal days on end, so thereby missing out on multiple trades that could have most certainly paid for the losses incurred by cutting the terrible position early and without emotion earlier on.  I ended up "being right," but only long after the fact.  Sometimes only a few hours or a day later.

Getting stuck into the psychology of being the trader that is trapped, I was helping fuel moves in the opposite direction.

When market approached my entry, I was trying to get out of it with minimal losses, and if there were more traders who like me, got in with some bright ideas and held on for dear life to be "right," we were all trying to do the same thing - exit with minimal damage.  If there is enough of us fools clustered in the same region, well - you get more market orders of the same kind pushing price around.  Your position, along with the others that are trapped, have turned into market structure.  Either you're in a short position that is trapped and your exit helps create support, or you are trapped in a long that went under and your exit helps create resistance. Et, voilà - move in the opposite direction is created.

I wish I could remember who I read this quote from...

(Don't be too harsh on me, I have had a long relationship with Mary Jane...)

But essentially this man was saying that every time he approaches the markets, if he has an open position he is going to default that new session, approach the market as if he has been wrong the entire time.

It...is genius.

Why try and be "right," when you can just be paid?

TL/DR: Use a stop loss, you friggin degen*.

*Again, directed at myself too.

If you are unclear about how to develop a system that will keep your head on while riding the ups and downs of your equity curve, check out some free education here and trade with me on Discord.  Higher-level education is available behind a paywall, don't worry - it is reasonably priced, and a worthy investment towards your success.  Also tons of highly valuable free, and public content available on YouTube.  

Trade without KYC with me on Phemex.