“I cannot Accept the Losses”

I cannot accept the losses

One of the biggest problems of any trader is accepting this essential part of trading business.

So how do you feel and behave when you believe this about yourself?

  1. Scared – “I cannot pull the trigger because it could end up being a loss!”
  2. Powerless – “It seems there is nothing I can do to remove the possibility of losing”
  3. Hesitated – “Something must be wrong with this trade, let’s wait another day, the Market just does not feel right”
  4. Annoyed/Frustrated – “I am trying as hard as I can, and yet here is another loss!”
  5. Angry – “Damn this Market and its stupid rules!”
  6. Reckless – “I am sure this trade is right, I will not let the Market play against me and stop me out with another spike, I will just put this trade on without a stop loss…”
  7. Inconsistent – “My trading system is just not working, I must change the rules to avoid such stupid trade in the future”
  8. Depressed – “It is all hopeless – how can I ever win if I keep allowing these losses?”
  9. Disgusted – “I swear I’ll never trade as long as I live!”
  10. Foolish/Embarrased – “I was so sure about this trade, I kept telling everyone how much money I’ll make in this one!”

Notice when you allow your brain to enter into any of these patterns of thinking. Take a look through the list, see what applies to you personally.

It is a great thing if we are able to catch ourselves breaking predefined trading rules, such as our Risk Management or Entry rules. However, it is our thinking patterns that lead to breaking the rules or to any other problems in our trading. Consider for a moment, have you ever caught yourself thinking any of the above thoughts?

Being aware of our thinking is much harder than being aware of the fact that we did not put a stop loss in a trade. If you learn catching the moment when you talk yourself into not putting the stop loss you will start working with the cause of the problem, not the effect.

So let’s reverse the original statement:

I can easily accept the losses

Now, this may not be true for you at the moment, but try to imagine how you would feel, behave and trade if this thought would be your reality.

  1. I am confident – the losses do not frighten me.
  2. I am comfortable with my trading system – I accept all parts of it
  3. I am at peace with anything the Market will do – I allow it to behave in any way it needs to.
  4. I am grateful for every opportunity to place a trade – whatever the outcome of that trade might be.
  5. I find all the circumstances helpful – any outcome is completely acceptable to me and therefore I am making myself available to learn from it.
  6. I am looking forward to getting a loss – it is the greatest signal the Market could possible offer to me.

Consider the last point – isn’t it really the greatest feedback the Market could ever possibly offer to you? The Market is not against you, it is simply there to teach. It is clearly telling you, from its perspective, that your view of the circumstances was not correct at the moment when you placed the trade. What did you believe about the current market situation just before you pulled the trigger? Take that belief, reverse it and you have the corrected point of view, available to you with Market’s help.

I you are serious about working with your beliefs, consider trying this method – Katie Byron’s “The Work”.

Limiting Beliefs

Trading can often be very difficult to manage as a business, when you are doing it all by yourself. Every single day you have to get up in the morning and repeat the same tasks over and over again. It can quickly become frustrating, especially in the beginning, when you are not really seeing any outcome of your hard work.

If you have to motivate yourself every day to get started, there is a problem already present. You are not a trader just yet, because you have to overcome the resistance that is constantly present in the background. Think about some other areas of your life, your hobbies, what really interests you? Do you have to struggle to get started in these areas?

Unless we learn to do all the tasks related to trading with enjoyment, we are not traders. We are simple trying to force ourselves into becoming what we are not. The only way to solve this problem is to work with our beliefs.

Try asking yourself, what is it that generates resistance to trading work in your mind? What beliefs do you hold that constantly come up and often do not allow you to work for 8 hours straight with ease and joy?

Here is a sample list:

  1. Trading is boring
  2. It is not “right” to speculate (due to your religious, political or any other beliefs – examine those)
  3. Trading is too difficult
  4. I need someone to tell me what to do in order to do it right
  5. I don’t like working alone
  6. I can’t work from home
  7. I don’t want to spend so much time at the computer every day
  8. My family/friends do not believe in me succeeding and so I can’t take my trading seriously
  9. I am too disorganized
  10. I am lazy
  11. I am not smart enough to trade
  12. I cannot concentrate well enough
  13. I don’t like getting up so early
  14. I don’t like going to sleep so late
  15. I am not lucky (examine your beliefs related to trading being “just luck”)

I could easily continue the list on and on, but the whole point is for each of us to discover our own limiting beliefs.

Let’s examine the first belief, “Trading is boring” in more detail.

  1. I could care less where the Market will go (great, you already have one of the most important components of a successful trader!)
  2. I don’t understand the Market (do you have to?)
  3. I don’t enjoy analyzing the Market (the better you get at something, the more you enjoy it – I did not enjoy practicing guitar the first couple months too)
  4. It is too difficult to keep all the information in my head (make notes, take screenshots, write a blog!)
  5. I am too tired and I am falling asleep as I watch the Market (review your sleeping schedule and eating habits, make sure you drink water ALL THE TIME, review your alcohol/smoking/caffeine addiction)

Once again, this is just an example of how we must take each of our beliefs and break them down into aspects in order to discover what is really limiting our full potential.

Unless you are ready to become self aware and look inside yourself – trading is not for you. Stop wasting your time, your family’s money and go find something you can be truly good at.

Long Term Conviction

There are many differences in our approach to short term and long term trading.

When trading short term you can start your day 3-4 hours before the start of the trading session, do your analysis, check the calendar, prepare the trading plan for this session and then follow it. You are only interested what the Market will do in the next couple hours so you only need to remain confident in your plan for this short period of time.

If you are not seeing the Market well today or just not feeling particularly well, you can simply skip the trading session and start over the next day – one trading session is not that different from another, so you will not miss much.

The main difficulty in long term trading is that we are preparing the trading plan for coming weeks and months and the trick is to maintain your conviction in this plan over a long period of time. No matter what the Market will do today it can hardly cancel your long term trading plan. It will gradually update your view with new information and it is up to you to keep the original scenario in your consciousness throughout many weeks until it plays out or is canceled.

How many times I would prepare the plan – a result of careful analysis over many days – just to find myself losing confidence in it over the next couple days. The Market does not cancel my scenario per se, it is just not confirming it yet, and yet sometimes it is easy to lose the sight of the big picture over the course of a couple days.

Two trading styles cannot be compared in terms of being better or worse – they are just different. Interestingly enough, they are not so different in their technical approach – the analysis methods and price action patterns can be very similar. Their main difference lies in psychological demands.

Long and Short term trading will affect our lifestyle differently, require our attention span to be very different and will present us with different psychological challenges every single day.

Subjective vs Objective

Despite of all the common advice in trading psychology books I’ve been reading I was never quite able to develop an extremely rigid trading rules in my system. Mark Douglas suggests to “have rigid rules and flexible expectations”. However, due to my belief of how the Market works, I find it difficult to explain my analysis or trading patterns in simple “if… then” terms. If I would ever teach anyone to trade, the best instructions I could offer would be something like:

  1. Make absolutely sure your Money Management will never allow you to lose
  2. Learn trading psychology (accept the risks and responsibility)
  3. Watch the Market daily
  4. Build an opinion
  5. Embrace uncertainty and test your opinion with your money
  6. Learn from the feedback Market is providing to you

In my mind, most of the trading setups have always been relatively subjective. The Market would just “look like” going down. At some point I just “feel like” getting out. However, the more I trade the more I recognize that there is certainly a place for fair amount of objectivity in trading as well. I just do not believe that objective concepts can be applied just about anywhere in my trading.

Cutting right to the chase, here is where I would try to define my trading objectively:

  1. Money Management rules
  2. Business organization (trading diary, trade analysis routines, preparation for trading routines, etc.)
  3. When NOT to trade
  4. When I pay myself – take my first profit and put the remainder of the trade in BE (e.g. close 30% at clear Reward:Risk target like 3:1)
  5. Checking minimum conditions any trading setup must have

And here is where I would trust my feelings and intuition (apply subjectivity) in my trading:

  1. Most of my market analysis, i.e. building an opinion or a bias for certain trading instrument
  2. Final decision whether to take an entry

Basically, what I am doing, is building a strict, rigid framework that protects me from making big mistakes and provides some structure for my trading. Next, I allow myself certain amount of freedom inside of that framework where I can trust my intuition (experience) about the Market.

For example, I am making sure that no matter what happens, any trading day, week or even month CANNOT result in a significant loss (1).  I also know what kind of work I must do every single day in order to manage my trading properly (2). I am making sure that under certain conditions (Market environment, life situation, etc) I am not going to trade because I do not believe that my intuition/emotions will provide appropriate judgement under such conditions (3). Next, I am making sure that I pay myself automatically, without even evaluating the current situation on the Market, as soon as certain amount of profit is reached (4). Additionally, before executing any trade I will make sure that it has some necessary parameters that I have defined – this gives me confidence to pull the trigger without hesitation (5).

However, I have to leave most of the Market analysis up to my intuition. Even though I have certain rules and checklists for Market analysis, in the end they only help me to clarify how I am feeling about the current Market situation (1). Additionally, even when I have a bullish bias on a certain currency and all minimum conditions are met to establish a position in that direction, I will still choose to miss that opportunity if I do not feel good about it (2).

The implementation of subjectivity in our trading is extremely difficult unless we are self-aware of what is going inside. It is still important to analyze our emotions and opinions, making sure that they are not caused by anxiety or some psychological issue that we were not able to resolve completely. Obviously, I am nowhere near perfection reading myself or the Market. However, I find it impossible to trade unless I listen to my intuition. I cannot build strict logical boundaries around my life and so I do not expect to put any part of my life (e.g. my trading) in a box either.


Recommended reading: Intuitive Investor by Jason Apollo Voss

Accepting Uncertainty

As I am doing historical Price Action and Strength analysis I am seeing a lot of great opportunities that I was watching live and missed nevertheless. I can see clearly that the Market is providing me with a couple great entries every single week, and yet I am not acting on many of those.

Naturally, when I look back, I make pictures only of great trades that I missed and so I fail to realize that there are many signals that look just as great in real time but would lose money if acted upon. This goes to show that picking out trading signals is a losing proposition on the whole. We must act upon anything that looks like an entry trigger in the potential long term direction.

Really, when we come thinking about it, how else can it be?

Any entry trigger is uncertain. It can never be a 100% indication of a profitable trade ahead. It is just an indication of a familiar pattern that is utilize in our trading system.

Any future trend is only potential. It can never be certain, we can never know how the Market will behave in the next couple days.

So the trading process is very simple:

  1. Accept the uncertainty
  2. Recognize an uncertain, potential future long term trend
  3. Recognize a pattern that simply looks like an entry trigger
  4. Accept the uncertainty
  5. Pull the trigger

This simple procedures assumes that all Money and Risk management is taken care off, and one should never even approach the markets without it. After all, this is the only area of our business where we can achieve some certainty.

Flexible expectations

Finding the trades

While there are many parts of trading business that are essential to trader’s success, the core area is undoubtedly finding and executing the trades. There are two parts of our every day trading process that are designed with that purpose in mind: Analysis System and Entry System.

Analysis System is designed to understand the current market conditions. It helps identifying what we can do on the market. It does not tell us when to trade, but it should certainly tell us when NOT to trade. To me, the essence of market analysis is to identify trading pairs where there is a higher chance of the price going in one direction over the other. When such trading pairs are found, the Entry System comes to action.

Entry System is designed to look for specific entry patterns in the direction identified by our market analysis. Main question that a good Entry System should ask is “Where do I put my Stop Loss order?” No matter what entry parameters we use, what targets we set, there is only one variable we have control over, and that is the amount of money we are willing to pay the market to find whether our trade is going to work or not (see the article in Issue 3). There is always a certain point in any market, beyond which it is not feasible to hold a losing trade. Thus, finding this stop point is the most important task of the Entry System. Without good Stop Loss, there should be no entry in the first place.

After identifying a good technical place for the Stop Loss, we will see whether the price is too far away from it, preventing us from having a good Risk/Reward ratio. When we see that Stop Loss can be placed in a good location, which is not too far away from the current price, we are ready to look for the entry itself.

At this point we already know:

  1. The market bias, or the path of least resistance in which we want to trade, that was identified by our Analysis System;
  2. A good Stop Loss price, beyond which it is not feasible to hold the losing position;
  3. We also decided that the distance to our Stop Loss leaves enough room on the other side (that is, profit side), so that our target can be placed with a good Risk/Reward ratio (ideally the potential reward should be at least 3 times the predefined risk).

All that remains at this point is to find the entry trigger, defined in our Entry System. For some it can be a certain indicator signal – I personally prefer to use Price Action patterns.

Executing the trades

After both the Analysis System and Entry System processes are finished, we should be able to take a trade right at that moment, since we know everything we need to do that. Unfortunately, often it is not the case, as we start to think and hesitate, trying to find the best trade of the day or making sure that it is “truly” the right signal. More often than not such hesitation leads to consulting the information that we do not use in our trading system, and therefore do not know how to use properly. The result is almost universally losses, frustration and subsequent psychological breakdown, leading to even more trading errors.

Even though our trading process should give crystal clear signals what to do or not do right this moment, at the same time we are always facing a certain amount of subjectivity on the market, as we can never predict the price precisely. We are building certain expectations where the price will go, and such expectations should never be made rigid.

Market expectations

It is very important not to have any attachment to our market expectations, as it is one of the main reasons leading to frustration and consequently psychological problems.

Think about it as a weather forecast. While modern technology increased the precision greatly, the weather can still be unpredictable, especially in some parts of the world. When you read the forecast, you build certain expectations for your day, possibly you are planning your weekend according to that forecast. Now, you may be planning a family lunch in the park on Sunday and your expectation, according to the weather forecast, is for a sunny day. After you made all the preparations on Sunday morning, it suddenly starts to rain, and does not look like it is going to stop.

What are your reactions to this situation? Are you going to be upset because you have to change your plans completely? Are you somewhat angry at the forecast stations, since they obviously made such a big mistake? Or are you going to quickly adjust your plans and spend a pleasant day with your family at home?

I am using this example because the way we treat such life situations will be the way we treat our market analysis. If we are not able to stay flexible in simple life situations and adjust the plans, we are not going to be able to stay flexible on the market, where the real money is at risk. Just like the attachment to our plans for the weekend leads to anger and frustration, so will our attachment to market analysis, and even more so.

When you expect the market to break the resistance and go higher, but it doesn’t, how do you feel? What if you already opened a position on the break and now watching the price go against you? Not only you are watching your loss growing, but more importantly, you are dealing with being wrong. The market went against your expectations, making you wrong. Or did it?

Being wrong

In modern life there are not many things that cause psychological pain for most people more than losing money and being wrong. You will find a lot of discussion in various resources about the necessity of accepting the risk and being ready to lose money (I prefer to think of it not as “losing” but as simple expenses of doing business or tuition fee if you are only starting the education). While acceptance of monetary risk is extremely important, another risk in our trading is being wrong, and I think it causes much more grief than the loss of money itself.

Think about it, most people build their whole lives around trying to be right. They argue, they try to prove, they believe to hold the truth that others need to know. How many people do you know that will continue the argument beyond any reason, when it is clear to everyone but themselves that they are wrong?

There is a vicious cycle that is created from attachment to our expectations:

  1. We learn about the market and find a method of analysis that we like;
  2. We apply it and build some rigid expectations about the future price movement;
  3. We act upon our expectations, placing money at risk;
  4. The market goes against our position “making” us lose money AND “making” us wrong;
  5. Fear and anger arise and we continue learning more about the market, with only one purpose in mind: to find a method where the market will not make us wrong. To prove to the market that we are right.

In this situation a trader is personifying the market, assigning certain qualities to it that allow the market to “go against” trader’s position and to “make him wrong”. However, in reality the market is a collective entity, comprised of millions of traders just like himself, and all it does is simply follows the rules to try and balance supply and demand.

The problem here is not the loss that we experienced – after all I am yet to meet a trader who will state that it is possible to trade without losses and with no risk. The problem is our expectations being too rigid while our trading regimen is too flexible.

The thinking goes like this:

“I expect the market to break this level and go higher, so it MUST do that. If it doesn’t do that, it is making me wrong and that is unacceptable to me. I must refine my trading method so that the market follows my expectations precisely, then I will show it!”

In other words, there is no way the trader is willing to change his expectations and review his analysis – after all he believes that the market MUST follow it. However, he is very willing to change his trading rules to adjust them in such a way that the market always follows his expectations.

Now compare it with the opposite attitude:

“My current premise was not in line with the money flow on the market and so my position got stopped out. By going in the opposite direction the market is providing me with new information that I can now use to review my bias and find new trading opportunities”

This thinking will allow the trader to build a better premise, because he has been exposed to additional information about the money flow on the market. Not only will he be able to learn from a possible mistake he’s made when defining his original premise, but also he will instantly see additional opportunities that the market is now making available to him.

One attitude says “This is unacceptable, I resent the price going against my position. I will make sure this never happens again”, while the other asks “What other trading opportunities are available to me now with this new information the market provided me with?” It is not difficult to see what is more helpful to the trader’s development. The first trader is full of ego, he is looking for someone to blame other than himself. The second trader is humble and accepts full responsibility for all his actions, which empowers him greatly.

In my opinion these two attitudes separate consistently winning traders from everyone else.


The psychology and trader’s mindset are closely related to his trading method, his profit expectations and ultimately to his consistency and success. If trading system allows to trade randomly, without rigid rules to enter and support a position, it will lead to losses and frustration. If your risk management allows to overtrade, not controlling the amount of money you can allocate for trading every day or each month, sooner or later it will backfire and cause irreversible losses, when one day can lose more than was made in the past half a year.

It is up to us to create a trading system with rigid rules, and to have the discipline to follow these rules. At the same time we have to develop a high level of mental flexibility, letting go of our expectations easily and adjusting to the new information the market is providing us with.

We can also see a relation between our trading term and the amount of difficulty we will have to control our business properly. When trading intraday, the market is pouring new information on us with such a high speed that it is beyond most traders to absorb it and account for this information on the fly. It is much easier to overtrade when you watch the chart in real time and see one minute candle forming after another. Undoubtedly, there are traders who reached high degrees of success in short term trading, but I would argue that overall success rate is much higher for the followers of a longer term approach.

However, no matter how much we discuss the trading psychology and proper mindset, it is very unlikely to rewire our brain just by thinking about it. A great amount of everyday practice is necessary in order to change many beliefs we’ve been living with for years. In the next issue we will setup a practice routine that is designed to ingrain the new beliefs about the market, risk management, our expectations and trading execution. By following such routine we will be able to change how our brain operates, remove the hesitation and anxiety out of equation and develop the mindset that is most likely to lead to a consistent success in trading.

Trading Accountability

Handling complexity

In his book “The Checklist Manifesto” Atul Gawande shows how very costly mistakes are avoided using simple paper checklists. He provides a very detailed account that we can learn a lot from.

The truth about modern life is that it became way too complex for most people to handle by keeping information in their heads. We cannot account for all the variables of the modern life. The doctor is not able to concentrate on everything anymore, the modern operations are way too complex. The pilot cannot control a modern airplane and keep all the details in his head, no matter how good he is at remembering things.

It is not by accident that all modern pilots are required to go through simple paper checklists. In the midst of all technical complexity of their cockpit, they have to take a simple paper checklist and go through it for virtually every single procedure they are doing. Similarly, a nurse can stop the surgeon before the operation and remind him that some simple check has been missed in a checklist that nowadays is a requirement in most modern hospitals. No matter how good the surgeon is, a simple piece of paper has proven times and times again to be better in avoiding crucial mistakes that cost lives.

In trading we can exercise the power of checklists like never before.

I was always a big proponent of simplicity of trading. I was always defending the position that a mid to long term trader can simply spend an hour a day checking the entry conditions, taking the trades and then calling it a day. To be fair, the analysis and placement of the orders really does take a couple hours but somehow I was never able to make it to consistency by doing just that. The answer is that I was never a trader and I certainly never managed a trading business. I was an analyst at best, a market hobbyist at worst.

Analyzing the market and then trading your plan are two very important parts that we already discussed before but they are only that – two parts of the whole, only two elements of your trading business. A surgeon who learned the anatomy of human body and how to use the scalpel and stopped right there will never be allowed to work in any hospital. He must understand the management, the paper work, preparing reports, planning the operation, have critical thinking to decide the best course of action.

Whether you make money in trading or lose depends on how you manage your trading business as a whole. That consists of your monthly accounting and review, weekly goals and limits as well as review, daily plan, analysis schedule, trade management, recording all your trades in a diary, gathering statistics for different types of entries, timeframes, pairs, etc. As you can see, the problem is not in the complexity of a particular trading method but in the amount of work that has to be conducted regularly to maintain trading as a successful business.

More importantly, besides regular daily life of a trader, there is another crucial part to it. Just like in any other business you must advance in order to stay on top. You cannot start an endeavor in any competitive segment of the market and hope to make it, if your knowledge base always stays the same, if you never learn and never improve. Trading, being extremely competitive, is where one must advance every single day.

Do you know the problem areas of your trading business? If you lose money, do you have a clear picture HOW exactly you lose it? Is it a certain mistake you repeat times and times again or a trading timeframe you can never get right? If you are making money with a certain degree of consistency how do you know it will stay the same tomorrow? What can you improve to stay on top of the market even better?

There are stages to development of a trader: you are first oblivious to these questions, then you ask them and then you try to answer. After you find some answers all you’ve really done is built a theory on how to improve a certain aspect of your trading. The next step is to put that theory to practice and see how well it works in real life.

The real simplicity of trading

When you created a system of accountability for yourself in form of trading diary, log and various process checklists, you have made a big step towards consistently. If we have no clear idea what to do in our business we can still work hard and stay busy every single day, spending countless hours, but in the end we can only reach consistency by being extremely lucky.

Here is why creating an accountability system is so powerful: it lets you know clearly if you are doing your job or not. In the end of the day you look back and see your diary entries, trading log, start of the day checklist, daily summary checklist and you know what you accomplished today and where you fell short of ideal.

When you have a trading system with clear rules and accountability system with clear rules, all that is left is to follow them every single day. At this point, the trading is still not easy because of the amount of work you have to do, but now it became simple – in a sense that you clearly know every step that needs to be done every trading day. When you are not satisfied with the results of your trading, you can always look back and analyze what can be improved. You can make a couple changes and then see how well they work after another couple weeks.

One of the main reason why the traders are so rarely reaching consistent success, in my opinion, is that there is little to none consistency in their approach. Some are inconsistent in their life habits: waking up at the same time to start trading day, analyzing the market at the same time, following healthy sleep regimen to stay alert and concentrated during work hours, eating properly to have enough energy, etc. Others are inconsistent in their trading approach: jumping from one trading system to another, constantly modifying their trading rules, not following the rules in the first place. Finally, I think most traders are not consistent in doing proper accounting of their business: market analysis is not systematically recorded, the trades are not logged and analyzed for mistakes, studying the market may be done sporadically and so on.

Having the discipline in all these areas is extremely important. As I keep stressing, being a trader is, first of all, being a businessman. A business owner is completely accountable for everything he is doing. The problem, however, is that he is accountable only to himself which makes it easy to avoid in the short term, destroying all chances for success in the long term.

Accountability system

There are 2 elements of accountability system that I think most important to trading success: morning checklist and evening checklist. These simple lists will guide you throughout the day, always making sure that you are on the right track.

Next, I suggest setting up 2 separate journals: Market Diary and Trading Log. I use Market Diary to record any interesting trading pairs, trade setups, trading ideas, etc. The Trading Log is used to record each and every trade that was taken. First of all I write all data about the trade: trading pair, direction, size, time, price, etc. Then I describe the trade setup – the signal that I used to open this trade. Finally, the most important part of the trading log, is to record my psychological state upon entering the trade. I write if there was any hesitation to pull the trigger, what was my state of mind, any distracting thoughts, etc. I repeat all the same steps when the trade is closed. A screenshot of the chart is also added upon entering the trade and later showing how the trade has been closed.

Now that the basic setup is done, all is left is to make sure that the work is done properly every day:

  1. All market analysis and trade setups are recorded in Market Diary
  2. Trading Log keeps every single trade that was opened and closed along with psychological analysis

Next, we make sure that we advance in our understanding of the markets:

  1. We spend at least 10 minutes a day reading a market related book;
  2. Along with current market analysis, at least one historical setup is reviewed to ensure that we learn something new about the market.

We hold ourselves accountable to do this work consistently by following the checklists. In the morning we check:

  1. Wake up at the same hour, before everyone else, to create a productive and distraction-free start of the day;
  2. Re-read Market diary from the previous day to get into the right mindset first thing in the morning;
  3. Review any trades in Trading Log that were taken yesterday and document any trades that were closed since yesterday.

In my opinion getting into the habit of waking up at the same time every single day (including the weekend) is one of the most powerful things we can do to our success. By waking up before everyone else around, you create a distraction free environment that can become the most productive time of the day. When the day has been started with positive action advancing you in life, it will be much easier to keep going in the same fashion for the whole day.

Next, we follow through our market analysis checklist, which is created specifically for our trading system. The main goal is to look for all trading setups of our system on all trading instruments that we watch and record all this information in Market Diary as a clear trading plan.

Now we are ready to go through the Take Action checklist. This list is designed to help us pull the trigger and open the actual trades. Here we check:

  1. What trade setups we have available and clearly described in our Market Diary – if there is no plan put on paper, we don’t trade;
  2. Check our risk allocation for today (following the guidelines discussed in the previous issue);
  3. Place the trades according to plan, making sure that we use only allocated risk;
  4. Document the trade entry in the Trading Log.

Depending on trading timeframe and trading system, it is possible that market analysis will need to be done more than once daily. In this example we use swing trading on Daily charts, allowing us to analyze and place trades only once a day, thanks to the fact that there is only one new Daily candle available.

In the end of the work hours it is very beneficial to use Daily Summary checklist:

  1. Check once again that all analyzed signals were taken and everything was documented;
  2. Do all necessary paperwork preparations for the next trading day;
  3. Clean the workspace, ensuring that the next day can be started without any distractions.

Of course, we looked only through a very basic example here. It simply provides an idea how one can organize his working day. Every trader should prepare detailed checklists for his particular method of market analysis.

Trading is definitely not easy, but it can and should be made simpler. The checklists help to cut through all the guesswork and instead manage the work each day with absolute clarity, knowing that nothing important is missed.

Being in control of your trading

The article is from Market Advance newsletter, issue 3

Three aspects of trading

In last article we explored three parts that in my opinion make up a successful trader. The most general assumption is that trading is about analyzing the market and predicting where the price will go. As we discussed, being an analyst is important – you do need a plan to execute in the market. However, that’s where most traders are stuck – finding a method they believe will make them rich, taking a couple trades that do not work out and then jumping to another method, assuming that they do not have sufficient knowledge about the market and therefore cannot open “the right” trades. The belief that I found to be groundbreaking in my own trading, however, is that there are NO “right” trades. There are simply trades offered by your method of market analysis and you have to take them all, before you make any judgments.

Therefore, the most essential addition to the set of skills of any trader, who desires to make profit consistently, is his ability to execute the trades with no hesitation, trade the plan exactly as his rigid rules are saying to trade it. The plan might as well be faulty and simply not provide the trading edge necessary to win, but without executing a sequence of flawless trades (not from the profit/loss perspective, but in terms of absolute discipline in following the system’s rules) you will never know that and very likely will switch to another Holy Grail only to find yourself with another set of potentially good rules that you cannot follow.

Five or even ten trades is not enough to judge any trading method. Your edge is not going to be visible and such a small set of data bears little to no statistical significance. Imagine a casino operating a slot machine with 4% advantage (meaning that they win 56 times out of 100 on average) calling a mechanic to repair the machine, or suing the gambler for somehow rigging it, just because after 10 customers the casino is in net loss.  Changing the machine after each 10 customers if their gambling produces a loss is just as absurd as changing your system after you have a couple losses in a row, especially if you “jumped the gun” on half the trades.

Mastering trade execution and getting a method of analyzing the market that provides you with some consistent edge are essential for any good trader. However, there is another aspect to trading we briefly discussed in the previous issue and arguably it can be even more important because unwillingness or inability of learning that aspect can help you decide pursuing a career elsewhere, long before you leave your life savings in the market.

Trading is a business

Like in any business, in trading it is most important to stay in control of what you do. First of all it implies having control over yourself, getting your mindset right and acting appropriately on each trading opportunity the market is offering. But when we see that opportunity and ready to enter in our direction, what do we really control in that trade?

I prefer to think of the trader as a small business owner. Anyone can open a small shop as a pursuit of having more freedom in one’s life, but interestingly enough 50% to 80% fail in the first 3 to 5 years. In trading I would argue that the failure rate is closer to 90%. My belief is that the reason for their failure (in business or trading) is defined primarily by the attitude they start with.

As we discussed before, the entrepreneurial freedom NEVER implies freedom from responsibility. In fact, starting out on your own increases the responsibility in almost all areas of your life:

  1. Your level of income
  2. Your medical insurance
  3. Your taxes and book keeping
  4. How you manage your time
  5. Your own development

It is my opinion that the understanding and full acceptance of this responsibility is what defines you as a success or a failure in business or indeed in trading.

In this issue we start our detailed discussion of managing your trading like a business. Being in business means being in control and yet I find that most traders have none –  often unknowingly giving up the only thing they have true control over in trading.

Being in control

If you are a small store owner and you are just starting out you can control quite a few things. First of all you control the stock in your store. You decide how you spend your initial investment. In trading that is your starting capital and in turn you control your Money Management and decide how many positions you can hold simultaneously.

In the store, when you spend $1000 to stock up, how do you know what your returns are going to be? Well, you know for a fact:

  1. The rent you are going to pay this month
  2. The salary to your employees
  3. You know the average bills you have to pay
  4. The advertising costs to attract the customers to your store

It is obviously an oversimplification, but it will do for our comparison. With that information on hand you add it to $1000 you just spent and now you know the amount of money you need to make in order to breakeven. Let’s say it is $1500. Everything above that is your profit (don’t forget the best part – the taxes!). Now, if you want to get $500, you have to sell your stock for $2000.

At that point you’ve already done your research and know that compared to your competition it is a reasonable price tag and given your location you should have no problem selling it at that price point. If (and it’s a big “if”) everything goes well, you just figured out your profit for the month.

Now, in trading you have some benefits, such as:

  1. No additional rent is needed (unless you like working in the office)
  2. There is no one to pay the salary to
  3. The bills are the same as if you would be living your normal lifestyle
  4. You have no product to advertise

In other words, you don’t have that extra $500 minimum you need to make this month just to get out in breakeven. In fact, the only thing you need to do in to order to stay breakeven is to do nothing!

The bad news though is that you have no expectancy for the amount of money you are going to make this month. On the one hand, you know your statistical results over the past months and if you are extremely consistent they can give a good average expectation for your profit (or loss). While the store owner can try to increase his sales in numerous ways by expending more money into advertising, introducing new services, etc., we can only do trades, and usually trying to trade more actively than our system allows will not increase the income by the end of the month – quite on the contrary, you stand a good chance to lose what you earned while following your system as it is.

When a customer enters into our hypothetical store, we don’t know what he is going to buy, if anything. He can go away empty handed or leave half his savings with us. We do know, however, that on this day we already invested ~$500/30 (our monthly expenses divided by the amount of days in this month) into our business in bills alone. We never know how this money is going to come back to us.

When you start your trade, similarly you have no idea what it produces. Yes, your edge provides you with statistics, saying that 12 trades out of 8 will make money, but you can never know the exact winners before they are closed and cashed in.

In reality, when you open your trade, there is one and one only variable that you have certain control over: how much money you are willing to pay the market in order to find out if the trade is going to work. In other words, your risk on that trade. You put your stop and you know where you get out if the trade doesn’t work. Everything else is only your expectation.

Giving up the control

Imagine that in our little store we decide to cut the costs on the salary by declining the medical insurance to our employees and instead paying the direct costs for any accidents they have. Yes, we are happy to know that we saved $100 extra every month but now we never know the costs of doing business. Another unfortunate day a fridge falls down and crashes our clerk’s leg, resulting in $100 000 hospitalization costs and ruining our business, all our savings – our car and the house taken away in addition.

Trading without a SL is exactly the same. If you give up control over the only variable you have in your hands in the market, you are going to do fine until one day you lose it all.

To emphasize the point, I offer this quote by Larry Hite in his interview in Market Wizards:

         I will tell you another story. I have a cousin who turned $5,000 into $100,000 in the option market. One day I asked him, “How did you do it?” He answered, “It is very easy. I buy an option and if it goes up, I stay in, but if it goes down, I don’t get out until I am at least even.” I told him, “Look, I trade for a living, and I can tell you that strategy is just not going to work in the long run.” He said, “Larry, don’t worry, it doesn’t have to work in the long run, just till I make a million. I know what I am doing. I just never take a loss.” I said, “OK…”

In his next trade he buys $90,000 worth of Merrill Lynch options, only this time, it goes down, and down, and down. I talk to him about one month later, and he tells me he is in debt for $10,000. I said, “Wait a minute. You had $100,000 and you bought $90,000 in options. That should still leave you with $10,000, even after they expired worthless. How could you have a deficit of $10,000?” He said, “I originally bought the options at $4k. When the price went down to $1k, I figured out that if I bought another 20,000, all it had to do was go back to $2k for me to break even. So I went to the bank and borrowed $10,000.”


The difference between any entrepreneur (traders included) and usual paid worker is in the acceptance of the risk and the responsibility. Most people prefer to live in the comfort of some assurance in life that they get a pay check every month as long as they follow the rules – and in the current economy that assurance is very tiny indeed. Any entrepreneur accepts and embraces the risk, giving up that assurance in exchange for control over his or her life.

As traders we can learn a lot in regular business. The costs of doing trading business must be defined as rigidly as possible.

We can:

  1. Set our monthly loss limit
  2. Set our daily loss limit
  3. Given the expected activity of our trading system, work out the amount of money we can risk in each trade, so that we do not exceed our daily loss limit after we fail a couple signals in a row

We cannot:

  1. Set a rigid profit expectation for every trade
  2. For every day
  3. Even for every month

Unfulfilled expectations will lead to frustration and mental disturbance, undermining our success in trading.