The typical trader is not profitable, and I suggest that one must learn to operate differently than the typical trader. One example is how the typical trader looks at risk versus reward. I’m not talking about probabilities or risk:reward ratios, I’m referring to something entirely different. One of the things I do in my work with traders is teach them to look at it the following way: The trader determines the risk, but any potential reward is determined by the market. Thinking about risk versus reward in this fashion has a number of benefits.
It helps operationalize what I mean when I talk about focusing on what we can control and letting go of the rest. It is also a good example of one of my rules in action, that we must be rigid with risk but flexible with expectations. This is part of the bigger picture of focusing on doing the right thing versus focusing on being right. And as I talked about in my recent webinar, a specific technique is for a trader to continually ask the following question at each point during the trading process when a decision or action is about to made: “Am I acting in my own best interest right now”.
Trading well over time requires that we control the risk and must be flexible with expectations by accepting the fact that we must adapt to what the market is doing regardless of our wishes. It also serves as a reminder that upon entry, a trader is essentially assuming that if they go long/short they believe (and need) other buyers/sellers are going to step in afterword and move the market even further by paying worse prices.
More on this extremely important idea of accepting risk and managing expectations in future posts.
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Adding into a winner trade is also one of the tasks to do in our interest as traders since we should be larger when correct.
However this could shift the risk/reward expectations, given the fact the average position after an adding is nearer to the last price: a retracement and you have to face the (fear) of the break-even level of the entire position. So adding or not adding? If not, the break-even shifts lower in probability and the trader could stay longer on the trade even with a retracement (the market in this scenario rewards more NOT doing what you you should do: adding into that winning trade).
How we should internalize that even if our behaviour follows our best interest, this increase the risk of trash everything?
@Paul
In my opinion, adding to a winner is an important part of successful trading, but it is an advanced skill. Advanced in the sense that one must master the basics of trading and psychology first; things like patience to make a good initial entry, being clear minded enough to recognize that a trade still has room to run versus a wish or fantasy that it is so. Also handling loss and remaining calm and poised when wrong, and managing our emotions including greed, which often takes a backseat to managing risk when adding to a winner.
The evolution of a trader is just that, an evolution, and I feel that certain skills need to be internalized first before mastering the more advanced ones. The work of ‘internalizing’ skills does not typically come from a book, a list of rules, or a seminar. It takes intensive work, the kind I do with my clients. Much more then a blog comment can capture.
Andrew
I decided to post the question since a trader attending your webinar posted a very similar question about how to handle fear during a winning position @ 1:25:20 but then it’s been re-phrased shortly by the host with the expression how do you handle/accept fear as internal state. I’ve simply reformulated the same question in an ‘adding into a winners scenario’ when doing what it’s correct and his/her best interest (supposing the first and the latter entries have been both executed with an edge and mentally internalized) could then face with a 0 result (if trade is going to be scratched, no loss is contemplated in this case after a pre-existing open profit), instead of a capturing the partial open profits before adding. However thanks for your feedback, Andrew.
@Paul
It would be irresponsible of me to give an “answer” without knowing about the trader’s history (both personal and trading history), how they approach money mgt, whether they scale or not, etc. Which is what I do with my clients. In other words, I can’t give you an “answer” that I am comfortable with unless I know the trader. Your question is truly an excellent one, and to me, it brings up one of the reasons why in trading, “one-size does not fit all”.
Andrew