Being right vs making moneyWhen pride manages the trade, the account pays.
Every trade can win or lose, however good your analysis. When you need to be right, you hold losers and cut winners, and a sound plan turns into small wins and big losses.
Every trade is uncertain
Every trade starts with an idea based on your analysis, and that part matters. But the outcome of any single trade is uncertain. Each one carries a chance of winning and a chance of losing, no matter how careful the analysis behind it was.
That is why the goal of trading is good decisions. Proving that your market call was correct, or enjoying the thrill of being in the market, is a different goal, and it competes with the first one. Your analysis gives you a reason to take the trade. It cannot tell you how this particular trade will end.
2 habits of needing to be right
The problem starts when you get attached to your prediction. Then 2 expensive habits creep in. The first is holding losing trades too long. Say you sell GBP/USD after weak UK data, and price climbs instead. Closing the trade would mean admitting the analysis was wrong, so you hold on, hoping the market comes back and proves you right. Hope is not a plan, and the loss keeps growing.
The second is taking profits too fast. The next trade goes your way, and you close it at the first pause to lock in the feeling of being right, even though your target was much further away and the move had room to run.
Small wins, big losses
Put the 2 habits together and the shape of your account is easy to predict: small wins and big losses. You can be right more often than you are wrong and still lose money, because the few losses you held are bigger than the many wins you cut short. At that point, your trades serve your need to feel right more than your account.
The tool below shows the maths. 2 traders each take 10 trades. Pick the one you think makes more money, then look at how often each of them was right.
Pick the trader you think ends up ahead after 10 trades.
Assume it could be a loser
Experienced traders flip this around. They treat every trade as if a win and a loss were equally likely, and some go in assuming it could be a loser. The loss at the stop is accepted before the trade is placed, as the price of finding out.
That takes away the pressure to prove anything. With nothing to defend, they can react to what the market is actually doing instead of what they expected it to do. A trade that is not working gets closed at the stop without a fight, and a trade that is working gets the room the plan gave it. Letting go of the need to be right is one of the 5 areas this module is built around.
The question for every open trade
So when you are in a trade, ask yourself a simple question: am I managing this position based on what price is doing, or based on wanting to be right?
The answer usually shows in the reasons you give yourself. Reasons that point at the chart, such as a level breaking or the stop being hit, are about price. Reasons that point at you, such as “it will come back” or “bank it before it turns”, are about being right.
About you
- “It will come back.”
- “My analysis was solid.”
- “Bank it before it turns.”
- “I knew it.”
About the chart
- Has the stop been hit?
- Has the reason for the trade changed?
- Is the target still in play?
- What does the plan say here?
Mistakes to avoid
- Moving the stop further away to give your idea more room. It is the same as holding a loser, with a better-sounding excuse.
- Closing a winner at the first pause to bank the feeling. The wins shrink while the losses stay the same size.
- Measuring yourself by how often you were right. Small wins and big losses still lose money, however often you call the direction correctly.
In short
- Every trade can win or lose, however good the analysis, so the goal is a good decision rather than a correct prediction.
- Needing to be right leads to 2 habits, holding losers in hope and closing winners early, and together they give you small wins and big losses.
- Treat a win and a loss as equally likely, and keep asking: am I managing this on what price is doing, or on wanting to be right?
Key terms
- Take-profit
- An order that closes your trade at a set price to lock in the gain.
- Win rate
- The share of trades that make money. On its own it says little: a 40% win rate can be very profitable with the right risk to reward.
- Ego
- The need to feel right, or above the market and other traders. When ego is in charge, you try to force the outcome and stop learning from your mistakes.