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In today’s episode, you’ll discover why you should not focus on your profits. Instead, you should pay attention to this one thing…
So tune in right away…
Resources
How to Create a Trading Journal and Find Your Edge in the Markets
How to be a Consistently Profitable Trader
Transcript
Hey, hey, what’s up my friends?
In today’s episode, I want to share why you shouldn’t focus on the profits but instead, you should do this…
When many people get involved with trading, the only thing that they look at is their profits and how much money they made. But here’s the thing, by focusing on your profits, it doesn’t make you a better trader.
Your trading results are random in the short run
Let me explain why.
In trading, we’re dealing with probabilities. And what this means is that in the short run, your results are random. I know that might sound weird but let me prove this to you.
Imagine that you have a coin in your hand. You’ll agree that there’s a 50% probability of it coming up heads and 50% chance of it coming up tails. If you toss the coin, let’s say six times, what do you think will happen? Will you get three heads and three tails?
Not quite. Sometimes you might get four heads and two tails. Sometimes you might get five heads and one tail, or even six heads and zero tails.
Now at this point, are you going to claim that the coin is flawed and it’s a gimmick? Isn’t the coin supposed to have a 50% chance of coming up heads and 50% chance of coming up tails? What’s happening?
Well, it’s simple. It’s something called the law of large number. It’s because you only toss the coin six times. It’s a small sample size. That’s why you won’t get near 50% heads or 50% tails.
But if you were to toss the coin 1,000 times, now you’re going to get much closer to 50% heads and 50% tails. And this is the same as trading because we’re dealing with probabilities.
This means that in the short run, with a small sample size of trades, your results will be random. This will have a huge implication on your trading, especially if you’re just focusing on your profits.
Because this means that you can actually make money on poor trading decisions, like averaging into your losers, widening your stop loss.
Yes, you might get away with it a few times and actually make a profit on those trades. But eventually, when the law of large numbers catches up with you, you’ll suffer losses and you might even blow up your trading account. That’s a huge implication.
Then at the same time, you might even make good decisions but lose money making these good decisions. Because remember, in the short run, your results are random. Bear this in mind.
This is why I don’t want you to focus on your profits, because in the short run, it’s random. If you want to get better at trading, you should focus on the process.
Focus on executing the trades over and over again, focus on trades that actually make you money and avoid the ones that cause you to lose money.
Focus on this one thing
Now, you may be wondering, “So Rayner, how do I find out what works and what don’t for me?”
This is where your trading journal comes into play. Let me just briefly give you an overview of how your trading journal will help you with your trading.
When you have your trading journal, you record down a few things:
1. Your trading setup
Are you trading a trend trading setup, breakout setup, a pullback setup, counter-trend etc.?
2. Your entry, targets and stop loss
These are the basic metrics that you’ll have whenever you put on a trade.
3. Your R-multiple
The R-multiple simply means that if you risk $1 and you earn $5 that is a profit of 5R, you made five times your initial risk. So write down 5R on your trading journal for that trade.
If the trade hits your stop loss, then that’s a loss of 1R assuming (no slippage) just put -1R.
So journal down your trades, be it 50, 100 or 200 trades. Then what you want to do is to review those trades and find out which setups are the ones that do make you money.
And remember, in the short run, your trading results are random. Don’t review your trades just based on no 4, 5 or 6 trades, the sample size is too small to come up with anything conclusive. My suggestion is to have a sample size of at least 100 trades.
This way your sample size is much larger and possibly there could be something meaningful behind it if there’re results to show.
So, using a sample size of at least a hundred trades, find out which setups are the ones that are actually making you money and focus on those setups. Those are the ones that are clearly working for you.
And then also look at your losers and find out which setups are causing you to lose money and avoid taking those trades. This way, your trading will gradually improve.
There is work involved definitely. But if you want to be serious about trading, these are the steps involved to get better results.
Let’s do a quick recap…
Recap
- In the short run, your trading results are random. Don’t focus on profits because it doesn’t really mean a thing.
- Journal down your trades and have a sample size of at least 100 trades. Focus on those setups that are making money and avoid those setups that are costing you money.
Sounds good?
With that said, I wish you good luck and good trading. I’ll talk to you soon.