MESSAGE FROM TRADERJANIE
Before we get to “What Surface Tension have to do with Trading,” I’d like to recap some of the salient points Mark Douglas makes in his excellent book Trading in the Zone.
- Learn to think in probabilities and are confident in their overall success because they commit themselves to stick to the rules that define their edge (with QiT that is the algorithm).
- Completely accept the fact that certainly doesn’t exist, as a matter of fact, they are certain that uncertainty is a perpetual state of trading.
- Do not try to cherry pick the edges they think, assume or believe are going to work, nor do they circumvent edges that they believe won’t.
- Believe that the trade they are in has nothing to do with any previous trades and understand the concept of random distribution between wins and losses on any given string of edges (trades). And by sticking to the rules you increase your sample size of trades, which in turn gives whatever edge you have ample opportunity to play itself out in your favor.
It’s just a Game of Probabilities
Successful trading is learning that this business has nothing to do with being right or wrong on any given trade. The best traders may have just as much negative emotional baggage as unsuccessful traders. But as long as they legitimately define trading as a probabilities game, their emotional response to any outcome of an individual trade is equivalent to how a typical trader feels about flipping a coin, calling heads, and seeing the coin come up tails. A wrong call for most people would not tap into their accumulated pain of every other time they were wrong in their lives. Most people realize that the outcome of a coin toss is random thus they expect a random outcome. Randomness implies some degree of uncertainty. If you believe in a random outcome, there is an implied acceptance that you do not know what the outcome will be. When you accept in advance of an event that you don’t know the outcome, that acceptance has the effect of keeping our expectations neutral.
Trading Rules and Surface Tension
Our portfolios do well so I understand the pull to abandon your trading rules and get out early; been there, done that. When you see the level of profits typically see, it’s hard not to. Let me make myself clear that I’m not here to admonish or judge but I would like to make everyone aware of something that goes on internally when they break their trading rules.
Do you all know the concept of surface tension? It’s the cohesive force among liquid molecules that will allow a paperclip to float on top of water, however, once that surface tension breaks, the cohesive force is fractured and the paperclip will plunge to the bottom.
Sticking to your trading rules is your surface tension. It is your cohesive force against all the internal uncertainty you fight against daily when trading. Thus breaking rules is like breaking your surface tension.
The problem arises when you do, and you get positive feedback, the probabilities of breaking your trading rules again increase and the second time will be even easier. By the third time, you will have probably convinced yourself that you are smarter than the algorithm. What I find ironic is that, if you break your rules and you get negative feedback, your resolve to stick to the rules only intensifies. So if you break the rules hope it doesn’t turn out well.
I know we will all break the rules at some point, we’re only human, but when you do I would like you to be cognizant of what is going on and reclaim your commitment to sticking to your trading rules.
ALWAYS FOLLOW THE RULES
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