The 5 fundamental truths of trading
For me these fundamental truths have changed the way I approach trading. I do agree with you simplicity is key, however, there are some concepts we must understand before becoming consistently profitable
The 5 fundamental truths about trading where developed and put into paper from the author of Trading in the Zone , Mark Douglas. Here I list these truths and explain in own words what they mean for me
1. Anything can happen.
The majority of trades even though deep down know that this statement is true they tend to avoid consciously understanding what it means.
And usually what happens is that traders spot a setup that have paid them in the past and forget all of their money/risk management rules, and increase
their lot size. This can be a recipe for disaster, especially for traders that experienced some losses and want to get back at the market with a big win.
No matter how good your setup is or how confident you are about a trade there is an infinite amount of things that can happen that can affect your trade
and even cause it to become a loss.
2. You don’t need to know what is going to happen next to make money.
I do not need to know what will happen next because I have a set of criteria that enable me to enter a trade with a higher probability of winning than losing.
Traders that experience high levels of success and consistency do so because they think in probabilities.
3. There is a random distribution between wins and losses for any given set of
variables that define an edge.
A loss or a win can happen in any trade. This is as true as the statement there is a sun. Also it means that you can have 3 consecutive losses and still be an amazing trader.
You have to accept that and protect your edge by surviving losses in order to provide your edge with a big enough sample size in order for it to pay off. If as a traders we accept
this truth then we can also accept that every loss puts as much closer to a win. If we adopt this mindset along with a sound trading strategy then even after a loss we will be
looking forward to the next occurrence of our edge, ready and waiting to jump in without the slightest reservation or hesitation. On the other hand, if we still believe that trading is about being right,
then after a loss we will anticipate the occurrence of our next edge with trepidation and fear wondering if it's going to work. This, in turn, will cause us to start gathering evidence for or against the trade,
thus we will not be in the most conducive state of mind to produce consistent results.
4. An edge is nothing more than an indication of a higher probability of one thing
happening over another.
Just because you have a system and set of variables that provide you with a favorable trading setup does not mean you are going to win every trade.
Losses are part of the game and you have to accept that. Thus, in order to evaluate your trading system you have to test in over a series of trades.
Thus, it is imperative that we follow good risk/money management rules in order to protect our capital and as a result provide our edge with a series of trades
in order to be able to evaluate the strategy accurately.
5. Every moment in the market is unique.
Even if market behavior closely resembles something that happened in the past, this does not mean that the exact same thing will happen now. This is impossible.
You should be aware of moments like these and try to consciously evaluate what you have in front of you and not make decisions solely on what you think will happen based on past history.
very truely said!
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The 5 fundamental truths about trading where developed and put into paper from the author of Trading in the Zone , Mark Douglas. Here I list these truths and explain in own words what they mean for me
1. Anything can happen.
The majority of trades even though deep down know that this statement is true they tend to avoid consciously understanding what it means.
And usually what happens is that traders spot a setup that have paid them in the past and forget all of their money/risk management rules, and increase
their lot size. This can be a recipe for disaster, especially for traders that experienced some losses and want to get back at the market with a big win.
No matter how good your setup is or how confident you are about a trade there is an infinite amount of things that can happen that can affect your trade
and even cause it to become a loss.
2. You don’t need to know what is going to happen next to make money.
I do not need to know what will happen next because I have a set of criteria that enable me to enter a trade with a higher probability of winning than losing.
Traders that experience high levels of success and consistency do so because they think in probabilities.
3. There is a random distribution between wins and losses for any given set of
variables that define an edge.
A loss or a win can happen in any trade. This is as true as the statement there is a sun. Also it means that you can have 3 consecutive losses and still be an amazing trader.
You have to accept that and protect your edge by surviving losses in order to provide your edge with a big enough sample size in order for it to pay off. If as a traders we accept
this truth then we can also accept that every loss puts as much closer to a win. If we adopt this mindset along with a sound trading strategy then even after a loss we will be
looking forward to the next occurrence of our edge, ready and waiting to jump in without the slightest reservation or hesitation. On the other hand, if we still believe that trading is about being right,
then after a loss we will anticipate the occurrence of our next edge with trepidation and fear wondering if it's going to work. This, in turn, will cause us to start gathering evidence for or against the trade,
thus we will not be in the most conducive state of mind to produce consistent results.
4. An edge is nothing more than an indication of a higher probability of one thing
happening over another.
Just because you have a system and set of variables that provide you with a favorable trading setup does not mean you are going to win every trade.
Losses are part of the game and you have to accept that. Thus, in order to evaluate your trading system you have to test in over a series of trades.
Thus, it is imperative that we follow good risk/money management rules in order to protect our capital and as a result provide our edge with a series of trades
in order to be able to evaluate the strategy accurately.
5. Every moment in the market is unique.
Even if market behavior closely resembles something that happened in the past, this does not mean that the exact same thing will happen now. This is impossible.
You should be aware of moments like these and try to consciously evaluate what you have in front of you and not make decisions solely on what you think will happen based on past history.