If You’re Not Giving Back Trading Gains You’re Not Trying Hard Enough!
"The unfortunate reality is you’ll always be far from perfect in your trading" - Featured Article from Confessions of a Market Maker co-host aka AllxDayxRay
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If You’re Not Giving Back Gains You’re Not Trying Hard Enough!
The title of this article goes along the lines with the saying, “If you’re not failing, you’re not trying hard enough”. The unfortunate reality is you’ll always be far from perfect in your trading. Initially being up on a trade, a rush of euphoria sweeps over you as the digits climb on your PnL, only to see those gains drop to a miniscule win: we’ve all experienced this. In many respects this hurts emotionally more than a downright losing trade…..but why? One trade was a win and the other a loss. I don’t know if I have the psychological answer to this question-I’m sure a trading or performance coach does- but it has always fascinated me. Having a trade go from a relatively nice win to a small win isn’t necessarily a sign of bad trading, although your emotions might have you feeling otherwise. In the proceeding paragraphs I’ll touch on why giving back gains isn’t a sign of bad trading, when it is a sign of bad trading, top traders pushing their winners, fear’s role in all this as our biggest motivator and keeping your sights on the “long run”.
It’s well established that bad results don’t always mean bad process. Recognizing if there is a correlation between results and process is one area which separates the professional from the amateur. Now this isn’t an article on results/process relationship, but it is relevant to the topic at hand. If you believe that giving back some of your gains on a trade is a sign of bad trading, this can lead to a myriad of problems. One of the most destructive issues it could lead to tilt- a slang word derived from the poker world, meaning you’re overcome with anger and rage and it’s guiding your decision making. Tilt can carry on over with you to the next trade, perhaps maybe even the next day; and it can be quite subtle too! This is clearly troublesome for a trader and doesn’t require any elaboration. If giving back gains gets you in this mental state, perhaps you’re not ready to “push your winners” and that’s OK. I used to always advocate for optimization in your trading but were human and we have flaws. Recognizing your limitations and understanding what stage you’re at as a trader is as an important skill as any.
Another issue in thinking that giving back gains equals bad trading is thinking your trading strategies or rules need adjusting; And perhaps they do and that’s for you to carefully consider. It would be a major blunder to tweak with your system’s profit-taking mechanisms if it’s not actually the problem. Maybe the strategy your implementing- scalping strategies come to mind- where keeping some of your position on after reaching an initial price target won’t show a positive expectancy. I think though for the majority of retail traders and the time frame they trade on “letting your winners runs” is a concept that will hugely contribute to your bottom line. For those unaware by what I mean by “letting your winners run”: let’s say price reaches a target or a potential area where we could reverse, you take some money off the table to insure a profit on the trade and continue with reduced size to see if there is any meat left on the bone.
I believe those that get bothered by giving back gains or traders that don’t implement the “let your winners run” concept, I believe its fear that’s driving this thinking. At a human’s core, fear is one of our greatest motivator; it’s evolutionary biology and what has helped us survive as a species. But in the activity of trading, it can be a hinderance if not recognized. And I believe this is precisely why people have a hard time with this concept. The fear of giving backs gains, and the emotional response that follows if you do in fact give back your gains, will trump any statistic or data that may indicate the contrary. How many times can you recall you closed a trade only to continue to see it run in your direction? We’ve all experienced this. But we’ve also experienced the opposite as well. “Why didn’t I just take the whole trade off”. The mind games you can play can be paralyzing. But let’s assume you have good risk parameters set up; risk management is the #1 job of a trader. At minimum holding a piece of your original position when a trade continues in your direction is a nice bonus; especially if it REALLY moves in your direction. Now how many times does this occur in a year? How may times over the lifetime of a trader? The times a trade runs in your favor- assuming your risk parameters are set up favorably- will greatly out weight the times you give some of the gain back from a pure profit standpoint in the LONG RUN. This concept will increase your bottom line and expected value as a trader. Most of your trades should fall within small/moderate wins and small losses; there may be variations to this, only speaking for myself. It’s the infrequent large gain that really juices the expected value of a trader and is something that a trader should ALWAYS keep in mind when evaluating charts- potential target or gain of a particular trade. It’s hard to be correct on a trade thesis, make sure it truly pays off when you are.
Don’t let fear temper your expected value as a trader. Push those winners as far as you can. As with anything, this concept can be taken too far, so make sure it makes sense for your style of trading and that you’re not giving back too much of your gains too frequently.
Ray (aka AllxDayxRay) teaches and trades live everyday in the Microefutures/EquitiesETC Trading Room Community.
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