Hey Everyone! 👋
Today, we're going to be talking about building a professional trading mindset. While this topic has been the subject of countless books and trading literature over the years, we thought it would be cool to break down a few of the most important takeaways for the TradingView community. Let's jump in!
1.) Start thinking in Probabilities 🔢
Let's take a quick look at one of the most important concepts in Trading and in life: Expected Value.
Expected Value is simply a number which indicates, based on probabilities, the value of executing a certain action. It can be positive or negative. Will this trade make money? Should I change careers? Should I marry my partner? It all comes down to Expected Value. Now - What makes up Expected Value? 2 things: Bat Rate% and Win / Loss.
Bat rate is the percentage of wins vs total outcomes. Win / Loss is the size of the average winner divided by the size of the average loser. In other words; What is the chance this works? How big is a win? How big is a loss? When you combine these numbers, you can much more clearly understand whether or not it makes sense to take a certain action.
Let's say, for example, that a certain trade idea has a 50% chance of working. A win earns you $2, while a loss loses you $1. Should you take the trade?
Let's find out. In this example, you take this trade 100 times. 50 times, you win $2, and 50 times you lose $1. You'd end up with a total profit of $50! ((50x2)-(50x1)). Clearly, this trade has positive expected value! So, even if you take the trade and end up with a loss, you still made the right decision, from an EV standpoint.
The tricky business with Expected Value is that Bat Rate and Win / Loss aren't hard numbers. They are estimates. Thus, building a feel for the likelihood of something happening, and building an understanding of the amplitude of wins and losses is a key skill to build for trading and life. An easy way to better calibrate your antennae for this is simply making a note of what you expect to happen in your trading journal. Over lots of repetitions, your ability to guess outcomes should improve.
2.) Self awareness 😵💫
In trading, actions of all market participants at all times are driven by 2 fears: The fear of missing out and the fear of loss. In other words, fear and greed. The thing is, depending on your brain chemistry and life experience, it's likely that one of these fears impacts you more strongly than the other.
Think of the following scenario: You put on a trade, and the position begins moving in your direction. The asset then begins trading sideways. Let's examine two ways this could go:
a - you close your position. Then, the asset begins ripping in your direction once more, tripling in price. You've missed this extra move, now that you've taken your position off for a small gain.
b - you don't take the position off, and the asset round trips back down to your stop loss, and you take an L on the trade.
Which of these scenarios is more painful to you? There's no *right* or *wrong* answer, but it's important to know which fear has a stronger hold on the decision making complex in your brain. If you find that you're more prone to FOMO, then try to figure out a strategy where you can squeeze every last drop of a winning trade. If you're more prone to the fear of losing, then try to figure out a strategy where the possibility of taking big or consistent losses is much less likely.
3.) Strategy fit is extremely important ✅
This tip piggybacks off of the last tip about self awareness, and really underscores the importance of consistency in interacting with the markets.
When you interact with the markets, having a written out, well understood trading plan is key to success. The biggest and most elite hedge funds in the world have clearly defined investment mandates, best practices, and business plans. What makes you think you don't need a plan?
That said, not all trading plans are created equal, and even the best laid plans of mice and men...etc.
When designing a trading plan, many new or intermediate traders focus solely on the money making aspect. As in, 'which strategy is going to earn me the highest amount of profit over a given period of time.' How can I gain some edge? Typically backtests, fundamental research, vision, and more play a part in helping define the criteria for a profitable strategy.
However, expert traders know that there's something even more important than defining your edge; ensuring consistency.
For example, let's say that you come up with a perfect trading strategy that should, in theory, in the future, allow you to trade extremely efficiently. The plan lays out a perfect set of criteria for buying market bottoms, and selling market tops. For newbies, this is the holy grail. However, just because you *understand* a strategy doesn't mean that you will be able to *execute* the strategy.
You could test this perfect strategy in real life, and if you're unable to execute the set of rules you've laid out for yourself in the heat of the moment due to your psychological makeup, then it doesn't matter how much edge the strategy has. You can't execute.
Thus, finding a strategy you can will yourself to execute with consistency, no matter what is happening in the markets, is of paramount importance.
In terms of expected value and self awareness, having a strategy that's 30% efficient but you can execute with 100% certainty is much more valuable than a strategy that's 70% efficient that you can only execute accurately about 40% of the time.
Not being stressed from a loss is the real flex. Design around preventing mistakes, not losses.
-
Anyway, thanks again for reading, and have a great weekend! Let us know with a comment below if you learned anything, and we'll consider doing a full series on applied trading psychology.
Cheers!
- Team TradingView
Today, we're going to be talking about building a professional trading mindset. While this topic has been the subject of countless books and trading literature over the years, we thought it would be cool to break down a few of the most important takeaways for the TradingView community. Let's jump in!
1.) Start thinking in Probabilities 🔢
Let's take a quick look at one of the most important concepts in Trading and in life: Expected Value.
Expected Value is simply a number which indicates, based on probabilities, the value of executing a certain action. It can be positive or negative. Will this trade make money? Should I change careers? Should I marry my partner? It all comes down to Expected Value. Now - What makes up Expected Value? 2 things: Bat Rate% and Win / Loss.
Bat rate is the percentage of wins vs total outcomes. Win / Loss is the size of the average winner divided by the size of the average loser. In other words; What is the chance this works? How big is a win? How big is a loss? When you combine these numbers, you can much more clearly understand whether or not it makes sense to take a certain action.
Let's say, for example, that a certain trade idea has a 50% chance of working. A win earns you $2, while a loss loses you $1. Should you take the trade?
Let's find out. In this example, you take this trade 100 times. 50 times, you win $2, and 50 times you lose $1. You'd end up with a total profit of $50! ((50x2)-(50x1)). Clearly, this trade has positive expected value! So, even if you take the trade and end up with a loss, you still made the right decision, from an EV standpoint.
The tricky business with Expected Value is that Bat Rate and Win / Loss aren't hard numbers. They are estimates. Thus, building a feel for the likelihood of something happening, and building an understanding of the amplitude of wins and losses is a key skill to build for trading and life. An easy way to better calibrate your antennae for this is simply making a note of what you expect to happen in your trading journal. Over lots of repetitions, your ability to guess outcomes should improve.
2.) Self awareness 😵💫
In trading, actions of all market participants at all times are driven by 2 fears: The fear of missing out and the fear of loss. In other words, fear and greed. The thing is, depending on your brain chemistry and life experience, it's likely that one of these fears impacts you more strongly than the other.
Think of the following scenario: You put on a trade, and the position begins moving in your direction. The asset then begins trading sideways. Let's examine two ways this could go:
a - you close your position. Then, the asset begins ripping in your direction once more, tripling in price. You've missed this extra move, now that you've taken your position off for a small gain.
b - you don't take the position off, and the asset round trips back down to your stop loss, and you take an L on the trade.
Which of these scenarios is more painful to you? There's no *right* or *wrong* answer, but it's important to know which fear has a stronger hold on the decision making complex in your brain. If you find that you're more prone to FOMO, then try to figure out a strategy where you can squeeze every last drop of a winning trade. If you're more prone to the fear of losing, then try to figure out a strategy where the possibility of taking big or consistent losses is much less likely.
3.) Strategy fit is extremely important ✅
This tip piggybacks off of the last tip about self awareness, and really underscores the importance of consistency in interacting with the markets.
When you interact with the markets, having a written out, well understood trading plan is key to success. The biggest and most elite hedge funds in the world have clearly defined investment mandates, best practices, and business plans. What makes you think you don't need a plan?
That said, not all trading plans are created equal, and even the best laid plans of mice and men...etc.
When designing a trading plan, many new or intermediate traders focus solely on the money making aspect. As in, 'which strategy is going to earn me the highest amount of profit over a given period of time.' How can I gain some edge? Typically backtests, fundamental research, vision, and more play a part in helping define the criteria for a profitable strategy.
However, expert traders know that there's something even more important than defining your edge; ensuring consistency.
For example, let's say that you come up with a perfect trading strategy that should, in theory, in the future, allow you to trade extremely efficiently. The plan lays out a perfect set of criteria for buying market bottoms, and selling market tops. For newbies, this is the holy grail. However, just because you *understand* a strategy doesn't mean that you will be able to *execute* the strategy.
You could test this perfect strategy in real life, and if you're unable to execute the set of rules you've laid out for yourself in the heat of the moment due to your psychological makeup, then it doesn't matter how much edge the strategy has. You can't execute.
Thus, finding a strategy you can will yourself to execute with consistency, no matter what is happening in the markets, is of paramount importance.
In terms of expected value and self awareness, having a strategy that's 30% efficient but you can execute with 100% certainty is much more valuable than a strategy that's 70% efficient that you can only execute accurately about 40% of the time.
Not being stressed from a loss is the real flex. Design around preventing mistakes, not losses.
-
Anyway, thanks again for reading, and have a great weekend! Let us know with a comment below if you learned anything, and we'll consider doing a full series on applied trading psychology.
Cheers!
- Team TradingView
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Read more about the new tools and features we're building for you: www.tradingview.com/blog/en/
