Quite the attention-grabbing title there, eh? I won’t even make you scroll through 18 pages of reading teasers only to NOT tell you at the end either what the big secret is…
So are you ready for it?
the secret to long term trading success is…..
knowing when NOT to trade!
That’s it!
Now allow me to apologize for the click-bait and leading you on; but there is no big secret; there is no magic ingredient; there are no guru’s with the big answer and the perfect system. (If there is, they aren’t sharing it with us!)
The magic ingredient is your own discipline. It is the discipline to know when to sit on the sidelines and not risk your capital. To know when market conditions do not allow us to put as many of the odds in our favor as possible.
There are many reasons, both external forces as well as internal ones, why sometimes the best trade to make is to NOT make one:
External Forces/Market Conditions:
Often times, the market you are watching is just simply in a mode of indecision. Perhaps it has been stuck in a sideways range for some time, and not really doing anything. If the market is directionless; how can one logically place a bet on a trend if there isn’t any trend?
We can take a look at current $BTC daily chart as an example. (There are better examples of a directionless market, there are worse; but this one is at least relevant and somewhat ‘real time’.)
We have traded sideways for almost an entire month now; with that ‘action’ actually being divided into two even smaller ranges (6200–6600; 6400–6800 roughly)
That is not to say there have been no opportunities over the last month, but speaking relative to your time-frame. If you are more of a swing/position trader and like to capture those bigger moves (10, 20+ %) on the daily, not a whole lot you could have accomplished over the last 30 days or so. If we zoom in a little bit more, we can see that we have been making lower highs and higher lows. In other words, tightening, and not doing anything:
Sure, one could present both bullish AND bearish scenarios based on the chart above, but as traders who know there are no certainties, the best we can do is act based on probabilities, right?
Let’s assume you are bullish, and think we rally 20% or whatever. That would require us making a higher high, which we have not done for 8, 9 months. The probabilities of you being correct in that bullish sentiment are much higher AFTER we make a higher high. AFTER we break to the upside of that pattern shown in chart above. Sure you won’t buy the low, and you will miss out on a few % points, but I would much rather increase my odds of being right on a 15% trade as opposed to flipping a coin going for a 20–25% trade.
I can virtually copy and paste the above paragraph for the other side of that opinion:
Let’s assume you are bearish, and think we tank to new lows by another 20%. That scenario would require us making a lower low, which we have not done since June 24th…going on 4 months. The probabilities of you being correct in that bearish sentiment are much higher AFTER we make a lower low. AFTER we break to the downside of that pattern shown in chart above. Sure you won’t short the high, and you will miss out on a few % points…..
I believe we should be going for more reliable, albeit smaller profits; as opposed to trying to catch knives by buying/selling an absolute low/high. Those singles and doubles with the .320 batting average; as opposed to the home-runs with the .250 batting average. This is a marathon, not a sprint.
Goals we SHOULD be pursuing:
- sustainability
- long-term profitability
- consistent growth
Viewpoints that do not lend well to sticking around long term:
- a lottery ticket
- get rich quick scheme
- all-or-nothing; boom or bust
Before I stray too far into the sports analogies and veer off-topic, the point to the above rant, and how it ties into the original subject, is that we want to increase the odds of any given trade being successful.
Oftentimes the best way to increase those odds (or to put it another way: decrease our odds of a losing trade) is to not make any trade at all. To let the trend reveal itself instead of trying to guess what that trend will be.
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**UPDATE**
I began writing this article about a month ago, as some of you may have noticed by the now out-of-date BTC chart above. It appears we were 29 days into this range when I wrote that section. As of now, Nov 9th, we are in day 64. We are in almost the same place we were in at day 29.
Again, this is not to suggest that there have not been opportunities over the last 64 days; but if one were waiting for the larger 15% + move, they are still waiting. It is all about waiting for the right opportunities when we can stack as many of the odds as possible in our favor.
Ok, back to the regularly scheduled musings:
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While not as common in crypto trading as other markets, another external factor to be aware of are news items and/or scheduled releases of coin specific, or broad market data, information, etc. Again, it is not nearly as common trading bitcoin or similar, but upcoming events are always something we should be aware of.
Of course, there are any number of additional external factors, but I want to talk about where the difference in that ‘magic ingredient’ comes in… the internal forces.
Internal Forces
The internal forces that we have a little more control over is where I believe the difference is made between long-term successful traders, and those who are not.
Again, knowing when not to trade. Sounds so simple, right? Just do nothing!
So why is it that we are often our own worst enemies? Why do we seem to do the wrong thing at the wrong time; or even worse…do the right thing, but at the wrong time?
I believe that our most costly mistakes in trading come from one of two broad categories:
- over-trading
- trading when your head is not ‘in the game’ for whatever reason.
Over-Trading
When we over-trade, I feel like we are pushing our luck with how often we can be right. Price action is determined by a collective of traders who are each exerting their level of influence on price by either buying or selling, right? Hundreds, or thousands, of individuals at any given moment, each acting on their own based on their interpretation of price. That naturally leads to a certain level of randomization in price movement, where the more often we try to guess what that price will do in any given moment in time, the greater the odds we will guess incorrectly.
While I am not sure if that can be mathematically proven to be a valid claim or not, this opinion is based purely on personal experience. As an example, let’s say I am scalping something, I am watching the 5-minute chart and I correctly guess immediate direction of price movement 4 times in a row by firing off profitable trades in a short period of time. Each of those trades lasted, say, 30 minutes long. Because there is a level of randomization to the markets, I need to be cautious of the fact that I am more likely to guess incorrectly with each successive trade if I continue putting one on right after another.
Allow me to offer a visual example if I am not making sense:
In the image above, let’s assume each smiley face represents a trade. You correctly play both long and short side 6 times in a row. After these 6 trades, you are probably feeling pretty good, pretty confident in your ability to read the chart, because it has been doing exactly what you thought it would, which allowed you to place 6 successful trades, back-to-back. Then trade number 7 comes along, and all of a sudden, the chart does something different than what you expected. It doesn’t reverse where you think it should. But how can that be? It was cruising along doing exactly what it should be doing, then all of a sudden it wasn’t! It is quite possible that you got so over-confident in your last 6 trades, that you just naturally assume the 7th will do the same thing, and likely discounted the randomness of the market and other traders’ reaction to the charts.
I kind of liken it to repeatedly flipping a coin. Flip it once or twice, and chances are good that you can correctly guess heads or tails. Flip it 3 or 4 times, those chances of correctly guessing each flip goes down. Flip it 5 or 6 times and those chances go down even more. Now trading is obviously a lot more dynamic than a random 50–50 chance of heads or tails, but the same principle applies where there is a level of randomness involved. That the more you attempt to guess a result, the more often you will guess wrong.
So if you find yourself making 10, 15 trades a day and getting frustrated that you are only profitable on half of them; scale back that number of trades. Quality not quantity, right? Trading is all about stacking the odds in our favor as much as possible to overcome the randomness, so when we are more restrictive to when we enter a trade, chances are that our results will improve. Don’t just flip a coin long or short.
Any specific examples that I used are just hypothetical, and based on anecdotal evidence from personal experiences over the years. Each of us have individual trading styles, so while my definition and threshold of over-trading is likely different than yours, there comes a point for each of us where the sheer quantity of trades will lead to increased chances of a loser, from either a mental mistake, or simply just reading the chart incorrectly.
Trading when your head ‘isn’t in the game’:
As I am sure you are aware, we are human beings with emotions! Good ones and bad ones. Productive thoughts and behaviors, and those that are less so. We have good days, we have bad days. We have days where we are really in-tune with what we are doing, feeling great; and others where we are just ‘blah’, struggling to just go through the motions.
Some days are better than others, right? Why would that same principle not apply to trading? I will highlight several of these mental obstacles that I have learned over the years to watch out for and be aware of. Would also like to add, that just because we are aware of these situations, the decisions we know are the right ones to make, are often not the easiest ones. Often times it is not doing anything.
Again, knowing when NOT to trade.
Revenge Trading
This is most likely one area that is the most damaging for traders than any other individual area. It is a very real and very damaging approach that even the best of traders fall victim to occasionally. The difference between those ‘best of’ and the remaining 90–95% is that they recognize when they are starting to revenge trade and either stop trading all-together, or reduce their risk and exposure to minimize any damage to their capital.
With many years of hands-on trading, it is still somewhat astonishing to me how fast this mindset can completely destroy a trader. I have seen many traders with good abilities fall into that vicious cycle that snowballs until eventually you blow your account out or become so distraught with trading that they give up all together. We must find the mental fortitude to otherwise put a stop to the bleeding before causing more damage to our capital. I, myself, have fallen into that cycle at times over the years.
Revenge trading begins after you make a bad trade or few. Or maybe even it was a good trade turned bad. Whatever the scenario, we feel like the markets took something from us, and we are determined to take it back on the next trade. Trying to make up for a previous trade can turn disastrous in a hurry as we are likely to not follow proper risk management strategies. We are likely to:
- take on a larger sized position than normal
- not sell our small profits because we have not been made whole from the previous trade
- not sell a small loss because, well, that doesn’t do anything to make up for the last trade either.
We likely hold on to that trade too long before we finally capitulate and sell, which of course, turns out to be the bottom more often than not. Now we are even more angry and have TWO trades to make up for, so the next trade is even worse. So on and so forth and can spiral out of control really quickly.
Poker players will recognize this as ‘playing on tilt’, and it is so incredibly important to have the self-discipline to know when we are starting to make trading decisions that are revenge (emotional) based. It is quite easy to tell ourselves that we will not fall victim to that mentality when we are on a level emotional keel. The true test of discipline comes in when we find ourselves IN that moment and we so badly want to enter a trade based on prior trade results. I know it is much easier said than done, but we must resist that urge to ‘get back’ at the markets.
Our Personal Lives
We all have personal lives that present its own set of challenges that can and will have an effect on our attitude and mentality. If we are in the midst of a challenging time in our personal lives, we have to be careful to not let that bleed into our trading. Trading is a challenging enough of a mental exercise without adding in the additional obstacles that come along with having a bad day.
Maybe we got into a fight with our significant other, maybe we received some bad news, or maybe it’s just a dreary day and we don’t feel ourselves for whatever reason. Trading while in a bad mood overall can very very easily lead to a case of the “eff it’s” that can do long-lasting damage to our portfolio and available capital.
We can all fall victim to it too, no matter how long we have been trading. Hopefully, over time, these instances of ‘preventable’ mistakes will get further and further in between and less costly. I recall maybe 6 months or so ago, I was having a pretty bad day and quite angry about something. I do not even recall why, but I do remember I took on a risky and volatile trade because it was hot the day before and had done quite well on a previous trade. After buying, the trade soon went against me, and instead of taking the small loss and moving on, I let my sour mood affect my trading decisions by holding on. I got a case of the “eff it’s”. In that moment, I stopped caring about what could go wrong and only focused on the trade going right and balancing out the cruddy day I was having. As the trade continued going against me, I naturally got more and more angry to the point where i just did not care at all. I was going down with the ship!
By the time I came ‘to my senses’, I was down big-time. I do not recall the exact % loss, but it was massive and it was costly. It took me almost 3 months to repair the damage I did to my account in the course of that one afternoon. I let one bad day have nearly 90 days of lasting consequences from not staying on my emotional guard.
By not taking the steps necessary to protect myself; from myself.
I let myself become my own worst enemy and did a lot of damage that was entirely preventable. Rather than ‘taking the day off’ and not trade, I thought that maybe by forcing myself to find a nice winner will balance out the bad mood and everything will be right again. Obviously, the market does not care about what kind of day I am having and turned a bad day into something much worse that resulted in several months of lasting effects. Once I finally did accept the loss, my first thought was to start trying to immediately recoup these losses by revenge trading. Thankfully, I believe I took a few days off by not trading, while I let my emotions return to an even level as I came to terms with the loss and the fact that it was entirely preventable. I had to shake it off before I felt comfortable entering another trade as I wanted to make sure that I was entering that next trade for the right reasons.
If our attention is diverted elsewhere, for whatever the reason may be, it is almost always better in the long run to take a break and come back to the markets when we are more focused. The markets are not going anywhere, and will always present another opportunity at another time. We must do our best to assure we have the capital to take advantages of those opportunities as they arise, as opposed to trying to force a trade now.
Trading is a never-ending mental battle in finding the proper balance to our emotions.
Being confident, yet not reckless; cautious, yet not paralyzed by fear.
Again, we want to put the odds of a profitable trade as much in our favor as possible, and a large part of that comes from acquiring the discipline of knowing when NOT to trade. Anyone can go on a hot streak of killer trades here and there; but very few are able to hold onto that and not eventually give it all back. The ability to acquire long-term consistency and profitability comes from entirely within ourselves. That consistency is not found in an indicator, it is not found in a book, it is not even found in a chart.
It is found by looking within oneself and knowing how trading affects your emotions and mental state; and in turn knowing how your various mental states and emotions affect your trading. Having an extensive knowledge of technical analysis and all the fancy indicators and such is great to have, but those tools are just the amenities. The real foundation is in knowing how, and when, your emotions are being detrimental to those odds of a profitable trade. When those internal forces are clouding your judgement on seeing the market clearly and without bias.
It is also important to never let our guard down in that regard. We can be incredibly diligent in our trading and in keeping those internal forces working in our favor 99% of the time; but it only takes one slip up, that 1%. It takes a certain kind of mental fortitude to be able to trade successfully, as we are always just a few bad decisions away from disaster. But that is why we must always stay on top of our emotions and our mental state. Assess how we are feeling, determine if we are seeing the markets without bias, and focus on what can go wrong in a trade. Take the proper steps in minimizing the damage to those trades that do go wrong, and i promise you that the ‘what-can-go-right’ part will most assuredly take care of itself.
One of my favorite sayings that has stuck with me over the years as it pertains to trading and in giving you that edge towards long term consistency:
There are 4 possible outcomes to any trade:
- big win
- small win
- big loss
- small loss
If we can eliminate one of those 4…we are well on our way. And a HUGE part of that is knowing when NOT to trade. Knowing when to sit tight and do nothing. Knowing that another trade will present itself in the future if we take the proper precautions to protect our capital NOW.
You still with me here? If so I appreciate it; I can be long-winded sometimes, but mastering our emotions and how it affects our trading is perhaps THE most important part of increasing our chances of long-term success in trading.
We must always stay on guard, we must always remain diligent, and we must have the discipline to know when NOT to put that next trade on.
Much easier said than done of course, as it is unlikely we will ever completely eradicate preventable mistakes from our trading. But what we CAN do, is learn to minimize the damages caused by those mistakes over time.
Knowing when NOT to trade…..
Now lets out there and…do nothing? 😀
until next time,
Happy (and safe) Trading,
pjmorin20
for more, please visit @PMtrading20 on twitter
