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Why Accepting Losing Setups is a Key Part of Trading

April 23, 2018 12:42

Source: Pexels

Dear traders,

Most traders are annoyed when they close a trade setup for a loss. They experience a wide range of emotions – fear, despair, and regret.

Ultimately, losing trades becomes just one aspect of trading. Traders must expect to run into losses because trading is not about perfectly predicting the market movements, but rather about finding setups that have decent probability in the long run.

This article explains how traders need to change their mental attitude towards losses. It shows that embracing all setups, also losses, is key. The main focus should be on following your trading plan and not about making sure that each setup is a win.

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Problems When Expecting Wins with All Setups

Many traders are too optimistic about their setups and expect one win after another. The reality is, however, that some setups close for wins and others for losses. In other words, wins and losses come and go…

There are a couple of issues when traders expect no or few losses. Here's a short summary:

  1. Traders search for the perfect trading system: they discard well-functioning systems because of one or a couple of losses. In reality, all systems should expect losses.
  2. Traders configure their system to get a high win rate: traders aim for every win rate, but to accomplish that they settle for very small wins. That means that one loss often wipes out multiple wins. They build systems that cut wins short and let losses run, the exact opposite of what traders should be aiming at.
  3. Trades are scared to enter or exit setups: once traders overemphasise that the next setup must be a win, their trading decisions start to become impacted by it. They could become too cautious with entries (filtering out too many setups) or with exits (hanging to setups rather then closing them for a small loss).

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Liberate Your Trading by Shifting Attention

As you can see from the previous paragraph, demanding a win with the next setup is very challenging and, in many ways, counterproductive. It makes trades stressed, emotional, and fearful.

What is the solution?

The main message is simple: change your mindset and care about a series of setups rather then the outcome of one trade.

Focus on Not Predicting

Beginning traders and most intermediate traders remain stuck at the level of caring about the result of one setup. But if you implement proper risk management, then one setup should not damage your account more than 0.25% up to 2% loss.

The problem with focussing on one setup is that traders will never know whether the next setup will work out or not. All setups are probabilities, and never ever is a win guaranteed. Traders should focus on analysing the charts and finding situations where you have an edge, in the long run.

Focus on the Long Run

One loss or win means nothing. Every system will encounter those regularly. Traders should and must focus on a series of trades so they can see the potential in the long run. The minimum number of trades is 40 to 50 setups. Once you have a group of setups, you can analyse the statistics and understand the potential of your system. This can ONLY be done when analysing the stats of dozens of setups, not just a few.

Cultivating the Right Mindset

It is crucial to know that we humans place much more emphasis on losses than gains so our minds naturally want to avoid them. This leads to suboptimal decisions across the board from analysis to entries and from trade management to exits.

Traders need to shift their attention away from emphasising winning trades on each setup to caring about the long-term performance, which can be measured only after a minimum of 40 to 50 trades

Shifting your mindset is not a simple task, but certainly a doable one… but only after you deliberately focus your attention on the process.

Eventually, you will not feel nervous about one particular setup because you will see the long-term plan is all about executing the trading plan as planned. You will eventually feel better about a losing trade that is properly executed (according to your plan) compared to a winning setup that was poorly done.

This is when you create a winning mindset and a well-trained trading psychology... The moment arrives when you let go of the potential profits that can be made and rather focus on the plan, on the implementation, and on the evaluations. You will care less about single trade setups that work well or not…

Wishing you a happy week of trading,

Chris Svorcik

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