When needing to be right becomes more important than making money from trading, you enter a place where there are few ways to escape. It reminds me of the movie Inception, where they enter a dream state, but if they stay too long are lost forever. It's the same way when the need to be right consumes each trade. The money that could've been made is lost forever. Most novice trader's assume that in order to make money, you have to pick the bottom and sell at the top. The concepts of position sizing, managing risk, trailing stops , etc. generally haven't been incorporated and molded into their daily routine. The novice trader will eventually cry King's X once the losses begin to mount from trades they refuse to sell.
Another way many traders reach this point is during a series of drawdowns. During drawdowns, they question their entries, exits, position sizing and even the entire idea of trading. The need to be right becomes too psychologically important and causes them to abandon sound trading principles. Before long, trades are exited too quickly and new trades are not taken for fear of not being right. As the cycle continues, the entire system in which they trade becomes random and unprofitable. So how do we keep ourselves from reaching this point? Or how do we escape once we are there?
First, every trader fights the need to be right, but the better trader can keep it in check by trusting their process. Once you've developed a trading strategy that is robust, has an acceptable risk/reward ratio, and doesn't conflict with your personality, you can than fall back on your process much easier. Naturally, a poor trading strategy from the onset will derail you from trying to make money to just trying to be right in order to preserve your account balance. Below are a few key areas to focus your attention on growing your account and less on attempting to be right.
- Make the action of the stock price determine your reaction. Try to use closing prices as much as possible. By focusing on price, random noise such as opinions won't seep into your mind as easily.
- Focus on position sizing and where you plan to exit if the trade goes wrong. Always risk enough per trade to make it count towards your bottom line, but not so much that it can adversely affect your ability to follow your system. I like to risk .50% to 1% per trade depending on how robust my trading lists are at the time. So, if I have a $100,000 account then I'm willing to lose $500-$1000 dollars on each trade.
- Always adhere to your stop loss and your trailing stop. You can always re-enter a trade if you are wrong. Remember it's not about being right but about following your system for each trade. Set your trailing stop so it's allows your best trades to trend the longest.
- Trade sound setups that have similar attributes. I know that this is a gray area because one person's setups are not another person's setups. We all like what we like, but when the patterns we choose to trade are similar, it becomes a whole lot easier to measure the probability of success.
- When you book a profit or a loss always remember that you were right because you trusted the process.