Keeping Your Current Trade in Perspective

If you're like me and get overly involved in the outcome of each and every trade, it's useful to keep certain things in mind to avoid becoming obsessed, upset, or both by what's happening with your current trade at this very moment. Or now. Or...now. Because while every trade is important, in the overall success of your trading system a single trade will not make or break you. Nor will a series of them, if you're managing your risks well. Here's what I remind myself when I find I'm getting riled up by a particular trade that's not going my way:

• Every system fails some of the time.
  
  
• If your system works consistently, the failure of a single trade will have a negligible outcome on its long-term success. In fact, in a system designed for the long haul, a single trade represents a mere fraction of a percent of the final outcome.
  
  
• So this day went badly. You'll just have to tack another day onto your trading career. If you don't feel like you have an extra day to spare, you should probably exercise more.
  
  
• If you're compounding your gains and risking a fixed fraction of your funds in every trade, the dollar sizes of your losses will increase as your funds increase. If you're getting upset over how big a loss looks in dollar terms, remember it would be a lot smaller if your system wasn't working.
  
  
• The fact that a trade's going wrong is trivial. The fact that you're worrying about it constantly is the real problem.
  
  
• This happened 10 times last month and you still made a nice profit. So calm the hell down.
  

On the other hand, if you have no system or context within which to place a particular trade, you have much bigger problems than that one trade: in fact, you probably shouldn't be trading at all until you have a strategy that provides the necessary rules, risk management, and long-term perspective that are essential to a successful trading career.

So let's say you have such a system in place - when should you be concerned about the results of a single trade? Surely there's some point at which it matters? In my opinion, that point is reached only when a trade is part of a continuing negative pattern that varies significantly from your system's expected outcomes. The time to take notice is when events that should be statistical outliers start happening with unusual frequency. For instance, if your system's expected success rate is around 60% and you've just had 10 failed trades in a row, that's unusual: the odds of it happening are around .004%. In a case like this, I'd tow my leaking system back to harbor and put it in drydock to see where the hole is and if it looks fixable. (Sorry, that nautical metaphor sort of got away from me. But you get the idea, matey. Arrr...)

Related topics:
Limiting your emotional exposure to the markets
Sticking to your trading system