Developing YOUR Heart-Mind Trading Edge. - page 3
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Food for Thought: Successful Trading
Successful trading really boils down to two major parts:
PART #1: Your Technical/Fundamental Analysis (Mechanical Trading Edge) gives you a reason to click: to enter the markets, which is what your broker and other market participants want You to do.
PART#2: What YOU do once in there determines what YOU put in your pocket at the end of the trade. Your Heart-Mind Trading Edge takes care of the second part. Don't trade without it!!! Always keep it sharp.
Click here now to get started on PART #2.
So now you have your first MUST HAVE (see Post #1) in place to begin trading: a broker. Next you venture off to find a trading system: your specific "recipe" to buy and sell. You get an email from your broker inviting you to attend a webinar to learn about how to use the platform. You also get invitations to their "Broker Trading Academy" where they teach you how to trade. You're ecstatic! Things are rolling along nicely.
So you put together some indicators and you begin trading in your Demo, BUT you don't know your system's expectancy. My system's what? Many books teaching you how to trade don't mention it, but it is very important to know. Expectancy is the average dollar amount you expect to win or lose per dollar you risk. You MUST have an idea of the success rate of your system. If you buy a system, you should ask. If it is not available, then you really don't know if you've bought a loser. Many traders don't want to take the time to back-test their own systems either (so I've been told by indicator experts)...too much work, but your trading heart-mind would thank you for it! Why is this important? If you're losing more than you're winning, your account (if you trade LIVE with that system) will go to zero. Not only that, that other You will show up in your trading and emotional responses may fly high. In other words you'll be setting yourself up to fail by installing mental and emotional pathways that will hinder your development that could lead to successful trading. Repetition is still the mother of learning. Trading habits will be installed that you may not want later on.
Some time ago, I asked a trading veteran (40+ years) why is it that traders hesitate when placing a trade. Without a second thought, they said, "Only two reasons: They don't have a reliable, trusted system or they haven't fully accepted the risk."
Hmm...food for thought. Will continue later in the week.
Feel free to post a thought, comment or question.
P.S. I'd like to add to that veteran's list: emotional scarring from past losing trades.Will be continuing to flesh out this post some. Will give you a formula to calculate Expectancy, and will discuss how repetitious behavior installs habits. Think that will be the focus for this week.
A Formula to Calculate Expectancy
In order for you to test the reliability/success of your system, your system should not depend on too many factors that are not consistent. For example, today you trade, and you use Fibs for your entry and exit. Tomorrow, you use a moving average cross-over. The next day you're using some fancy stuff you bought online.
Whatever your trading recipe is, it should be that, and that alone. If you've tested it and find it is not working to your satisfaction, then you can make modifications and test the new "recipe".
So, assuming you have that specific trading recipe, you need the following:
Let's do the math:
So you've placed 100 trades with your system. Of course the more trades you do, the more convincing/valid the result.
Of those 100 trades, 60 were winners; 35 were losers and 5 were breakevens.
When you add the dollar amount of each winning trade, you get $3,832. The average per winning trade would be:
$3,832 / 60 = $63.86
When you add the dollar amount of each losing trade, you get $1,323. The average per losing trade would be:
$1,323 / 40 = $33.08 (NOTE: I am including breakevens here as a loss. If you decide not to, then you have to adjust your percentages, as the total number of trades would no longer be 100).
The EXPECTANCY of your system then would be:
(.60 {60%} x $63.86) - (.40 {40%} x $33.08) = $38.31 - $13.23 =
+
$25.08If you get a negative number, then you are trading a losing system. (Might be a good candidate for reversing each trade...just commenting, not suggesting that you do it).
Why should you even bother doing the math? The numbers will help You with your confidence, which should allow YOU to trade your system diligently and stick to it.
Developing Your Mechanical Trading System: Edge 1
Just in case you're a Newbie, and are a bit lost at that thought of putting a system together, here is an idea of what it is:
(General terms used here):
Let's say you decide to use ABC and XYZ indicators. These indicators tell you to look for 123 and 456...whatever those happen to be. You decide that you can trade the M30 time-frame comfortably enough for your temperament and personality style.
Your recipe may look something like this:
On M30, when I see ABC showing me 123 AND XYZ showing me 456, I will buy. My exit will be 20 pips or at ???FIB% or whatever. I am willing to risk X #pips on this trade, which I will hold myself to using a stop loss.
You should develop a similar set of rules for going short. Try to make your entry and exit criteria as objective and exacting as possible, with the least amount of discretion required. This can be tested by you trading this in your DEMO, which would also allow you to get an idea of your performance (though trading LIVE is the acid test of that), or you can backtest your trading system: just scroll back in time and look for your triggers and record the outcome. Backtesting would give you an idea but without the loss of time in waiting to put on those 100 trades to then calculate the expectancy.
Remember, when backtesting no cherry picking is allowed. What? I like this one and not that...record each and every trigger you see that fits your system.
NOTE: Not all traders use stops. This is just an example. Please do your own research when putting your Mechanical Trading Edge (System) together.
A word on Expectancy and Backtesting
I hope those of you who have been reading these posts are not going to try to talk yourselves out of it; that choice is always yours of course. Unfortunately, many do. I remember several years ago when I was told about it, I was not thrilled about putting in the time and effort to get those numbers. The person who told me about it had studied and researched every existing indicator at that time...and still do today. They said, "Most traders won't do what I'm telling you, but, if you do, you'll be very glad you did." I trusted what they said and did it. Yes it was tedious and boring in the beginning. But, when I began to see that my system was a very good one, I got excited. Now there is trading software that you can use to backtest, depending on your style of trading and trading method.
Anyway, I can't tell you enough how my level of confidence shot up. I knew my system worked very well, but I didn't know how well. When I saw that, trading became much easier. I will always be grateful to that indicator specialist for leveling with me and telling me the truth.
So, I'm passing it on to you: those of you who really want to succeed in this business. Do you think hedge funds etc. would use a system that had not been tested? Be a professional about every aspect of your trading business. Don't take shortcuts: they will cost you every time.
The Freezing Zone
Hope you all are having a better trading week.
Next week I hope to continue with Post 22: https://www.mql5.com/en/forum/184987/page2 Remember those thoughts that pop up just as you're getting ready to click? Will touch on that a bit.
Here's another good place in the thread to post a question or comment.
Have a great weekend.
A Common Trading Scenario
Here's a scenario I believe every trader has encountered:
You've done your analysis and are about to place a trade. You feel good about how the market is confirming the trade you are about to place. Just as you're preparing to click, a thought pops into your mind:
"What if you're wrong? What if it goes the other way?"Here are some questions that YOU need to answer:
Developing this Heart-Mind Trading Edge is a very deliberate and focused process: and it works! It will revolutionize your trading.
Here's a scenario I believe every trader has encountered:
You've done your analysis and are about to place a trade. You feel good about how the market is confirming the trade you are about to place. Just as you're preparing to click, a thought pops into your mind:
"What if you're wrong? What if it goes the other way?"Here are some questions that YOU need to answer:
- Where did that thought come from?
- Why did it come at that instant?
- Who or what is speaking?
- What do YOU say to it?
- What did YOU do in response to that thought?
Developing this Heart-Mind Trading Edge is a very deliberate and focused process: and it works! It will revolutionize your trading.Beginning this week, we'll be taking a look at one or two of the questions listed above, but there is one question that is not on the list, that every trader needs to answer. That question is this: What is that thought (or those thoughts)...those that pop into your mind as you are getting ready to click...trying to get me to do? The answer to that question, followed by a series of "Why" questions will expose some core issues in your trading.
Work on that for a bit. Will continue on later this week.
Have a great trading week.
The Intelligence of that Other You.
One of the first questions I'd like to discuss is this one:
Why did it come at that instant?
Remember the scenario...you're getting ready to place a trade, and at that instant, a thought pops up in your mind that says,
"What if your're wrong? What if it goes the other way?
Here are some key things to note:
1. YOU did not initiate that thought; it just "popped up".
2. It obviously originated from "somewhere" within yourself.
3. That part of you is aware and in touch with what is happening just as much as that part of you that makes conscious decisions.
4. It is intelligent based on the nature of the question.
5. It has "reason" to show concern.
This part of you is not going away, but, it can be incorporated into your trading to increase your Heart-Mind Trading IQ.
Will continue exploring this next week with a real trading example.
The Dollar-Yen Trade
Recently I was looking at some currency pairs to see if I could find my trading edge that would indicate a potential price move. Dollar-Yen looked interesting. Not a pair I normally trade, but things looked like they were brewing. So, I began observing price action.
I could tell that I was slowly getting to the point where I (my Heart-Mind) wanted to go long, but, the things I usually look for weren't all there....yet. I thought to myself, "Things are close enough. They may not be exactly what I would like to see, but go ahead." I (my Heart-Mind) felt a bit uneasy but I (my Heart-Mind) clicked anyway.
Price began to move in my favor then it reached an area where it just couldn't break through. It tried three times, and each time the uneasiness became more gut-wrenching. I had to make another decision. I said to myself, "I don't like this. It doesn't feel right AND it doesn't look right." I closed the trade. What happened? Price fell after the third try. Later it turned and continued higher. If I (my Heart-Mind) had listened in the beginning, I would not have entered at that time, but would have waited for my set-up to mature fully...which it did. However, had I not listened the second time, I would have gone into hope mode and entered into the "deer in the headlights" syndrome which can develop when we ignore the input from the heart side.
What I was really grateful for was the understanding of the way in which the Heart-Mind connection works. The key is learning how it works to CONFIRM. Some traders panic with every tick, even if price is going as it "should" and in accordance with their trading method. That is another Heart-Mind issue that needs to be addressed.
Next week we'll touch on the power of BLINK!