Day traders' weekend lounge April 19 - 21, page-22

  1. FXm
    36,980 Posts.
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    Trading Psychology - a blackjack analogy

    Amateur traders try to make money, professional traders try to make good trades

    The most important aspect of trading psychology is to understand and accept that trading is a probability based activity. Which means the outcome of the trade is outside of your control and anything can happen. Your job as a professional trader is to make good trades. A good trade is a trade with good edge (edge being defined as something that brings your probability of success better than 50%) and solid risk management. Edge is different in every trading style and market but outside of specific strategies, your flow / marketing reading skills, pattern recognition, execution speed and accuracy all contribute to edge.

    Thus, let's assume you have defined and tested your edge, then your job is essentially the same as a blackjack dealer for a casino.

    The blackjack dealer knows he has absolute edge - 51% (give or take depending on rules). The owner of the casino doesn't hire him and say to him 'make me money'. the blackjack dealer's job description is to deal the cards in the correct way and play out the game as the dealer in a correct way as the edge is absolute and as long as he does what he is supposed to do, he will make money in the long run. If he deals out 5 hands and then busts as the dealer, he doesn't go and complain about it, he doesn't stop dealing for the day, he doesn't blame the game or the table or his own hand. He simply keeps on dealing.

    Trading is very similar - except you have to define your edge first. Once that is done, you simply take all trades with edge irrespective of the outcome. Your job as a trader is to do good trades, you make money as a result but that isn't your direct job. The reason this distinction is important is when you view your job is to make money, losses start to affect your decision making, you start getting into bad habits of 'revenge trading', 'fear', 'stubbornness' and all the vices of trading psychology. You start taking losses personally and let it affect your decision making - losses are part of the probability.

    Why is this analogy easy to understand? Because people accept the outcome of Blackjack (without card counting) is random but often have trouble accepting that markets are random.

    The point of this analogy is that once you have spent time to define your edge, the outcome of individual trades will become irrelevant and you should only evaluate yourself based on whether you executed according to your plan and if there were edge in the trade.
 
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