If I KNOW How to Trade and Manage Risk, Why Can't I Do It When the Money Counts?

Discussion in 'Chit Chat' started by Rande Howell, Nov 1, 2011.

  1. by Rande Howell, MEd, LPC

    The Difference Between Knowledge and Performance

    Cognitive knowledge of how to do something is very different than managing performance during challenge. Until the learned knowledge about trading and risk is integrated into the emotions and mindset needed for peak performance in trading, then the learned knowledge is simply not available to the trader during the emotional environment of trading. The learning has not taken place in the emotional context where the performance will be measured. This is because the way you think is emotional-state-dependent.

    What does this emotional learning look like to a trader? Traditionally most traders learn how to trade and manage risk while paper trading where there is no risk of loss. People can learn how to trade well and manage risk well in this emotional environment devoid of real risk. They learn the mechanics of trading, how to use their methodology, and get valuable screen time for pattern recognition. And, as they learn how to use these tools, they become profitable on paper, but without the context of the downside of the risk of uncertainty.

    The problem is that you cannot go to the bank and cash in your paper profits. Yet, when the trader takes his or her learned skills into the arena of live trading where capital is at risk, a very different emotional environment takes over - one in which the trader is rarely trained and for which he or she is not prepared. At that moment the skills the trader learned in the emotional environment of a classroom simply are not available to him in the emotional environment that occurs while live trading where the possibility of capital loss is real and tangible.

    These are completely different emotional worlds. And the knowledge gained in the no-risk paper world is not usable until the trader adapts to the new sets of emotional skills and mindset needed for risk management where personal capital is actually being put into play. This is where emotional intelligence is far more important than head-knowledge.

    Live trading exposes the fear-based mind that interprets the uncertainty of trading when capital is at risk. Depending on your beliefs about losing, you remain locked into loser’s mind or you learn how to learn from your losses by bringing a powerfully different mindset to the ambiguity of trading.

    Teasing Apart Uncertainty and Fear

    A highly disciplined mind is the undercurrent that lies beneath emotional management of both methodology and platform. No one becomes successful without emotional discipline. For the vast majority of traders who want to become successful, emotional discipline is built, not found. It is not found out-there in more rules that you will not follow in the heat of trading. It is found by acknowledging your fears and re-training your beliefs so that losing becomes an opportunity to learn and grow from your mistakes – instead of trading NOT TO LOSE. In training a mind to trade, the crucial step is that you and the way you perceive (your mind) learn to embrace the uncertainty of probability. It does not come natural. And your staying in denial about this need keeps you stuck in your self-limiting performances.

    Until this happens, your brain is always going to chase certainty because that is what it has evolved to do over countless generations. Your brain is biased to feel certain that there is an answer that will correctly predict what the markets will do. No matter how much evidence there is to the contrary, the brain and your mind will resist probability thinking. It wants to stay in certainty thinking. This is simply not an effective mindset in trading where the illusion of control is dangerous.

    Now add social adaptation to your biological pre-disposition. Most traders grow up in families, schools, and cultures where they learn to not make mistakes, to not lose, and to always be right -- and you have the perfect storm for forging a brain and mind unable to think in probability terms. So the brain and mind that you bring to trading rarely has the capacity to separate uncertainty from fear. And, sure enough, most traders fear uncertainty, which is exactly what they must manage from a probability mindset to be successful traders. If fear is linked to uncertainty, a trader has difficulty moving from paper trading to live trading. And they will continue to have problems until this linkage is disrupted and reformed by new beliefs about uncertainty, losing, and winning.

    Learning, Failure, and Trading

    What happens when a trade goes against you? (This will tell you a lot about what you learned about how to be successful.) In our culture being successful is associated with not making mistakes. Success is about winning...being a winner. Yet successful trading involves relearning how to lose. Because you are going to make mistakes and you are going to lose. It is the frequency of winning and losing (and the size of the winners compared to the losers) that counts. Learning from mistakes is the key to becoming a successful trader – it is what separates successful traders from inconsistent traders. The perception and beliefs you have about winning and losing will be put to the test in trading.

    When you lose, do you trigger to self interpretations of inadequacy, powerlessness, and unworthiness? This will expose your faulty beliefs that link your performance with self-limiting beliefs. The fact is that the brain (and you) learn only from failure, not success. Success actually locks you into a comfort zone that keeps you from growing. People get locked into once successful strategies and refuse to change when the strategies no longer work. That’s success for you. When you lose, you have high motivation to change. This is key. When you develop a mindset that stops attempting to avoid mistakes, but rather becomes curious about learning from the mistake – you are on the road to probability thinking.

    Learning to trade successfully is not about being smart. It is about putting probabilities in your favor and having the emotional stamina to stay in probability thinking, rather than chasing certainty as the Holy Grail. This is the mind that you need to bring to trading. You manage your risk and then move on. Loss is not a statement about the worth of your being. Loss is only about your performance in risk management. Mistakes happen, learning happens, and another trade (with greater skill) becomes possible.

    It’s not really about whether you like risk or not. It is about becoming comfortable with risk. This is where uncertainty, and its management, is separated from fear. And it is where the journey of a trader moves from the need for certainty to the management of the ambiguity of the uncertainty of trading in the markets. What mindset do you bring to uncertainty, ambiguity, and losing in trading? The effectiveness of the beliefs behind that mindset will be found in the balance of your trading account.
  2. otherguy


    I would like to direct you to Arthur Schopenhauer, reason verses the will. When trading if we are governed by the will we loss, if governed by reason it’s a profitable day.
  3. Rande, you're selling shit so you need to become a sponsor or stop posting links to your site.
  4. oraclewizard77

    oraclewizard77 Moderator

    I was trading on sim for a couple weeks including Mon trying to prevent revenge trading and test new strategies. On sim, I revenged traded once, then got better. I started having no losing trades including yesterday.

    I went live real money again today, and 1st trade was a winner although I killed my target 1 -3 ticks early to lock in gains when I should have just waited for market to take my target out on a limit exit.

    Right after making the profit, I felt the need to trade again right away with or without a setup. I was able to prevent myself by switching back to sim and taking the trade in sim. It was not a good entry, but once I was in the trade, I was actually able to turn it into a small profit.

    Seems I may still have some problems of waiting for my setup. Setting proper stops and targets, and not over trading. I am trying to prevent over trading like I was able to do today, by limiting the number of times I trade.

    I think one of the worse losses was on a day that started profitable for me, and then I took a loss. This made me want to make back all of the money that day, and I started to do a bunch of trades which of course made a bigger loss.
  5. hitnrun


    if a trader has enough money that there drawdowns don't effect them in negative way then they have the best chance for success

    You have to have enough captial that it does not affect your trading behavior

    trading scared money is the biggest problem for most traders

    overtrading & feeling compelled to be in a trade all the time are your worst enemies

    You have to trade the setups & not your pnl is the best approach for the trader

    with greed & fear contolling your every move then trading becomes difficult for most to manage on a daily basis. The market is a emotional rollercoaster for most people

    emotions destroy the trader in making bad decisions with money at stake is what often happens to many of us at times

    trading should be considered boring but rewarding for those that work hard & stick to a gameplan that protects there capital & allows you to execute your trades according to your rules

    at the end of the day it comes down to focusing on being profitable each week & always protecting your working captial to stay in business

    if someone can stick to a gameplan with applying discipline, patience, & confidence in taking quality trades then they could put the odds in there favor

    quality vs quanity is what matters . It's all a mental game

    trading is a marathon not a sprint
  6. jokepie


    Trading as a process is immaterial, as anyone can press buttons, understand EMAs, pivots, find trends, master the economic indicators and still fail to make money.
    Risk management is the only factor that will push one over from just trading to profitable trading consitently.
    Risk management is beyond - setting stop loss and risk reward ratios. Calculating risk per trade is another indication that the trader is still stuck in this eternal loop of learning.

  7. LOL

    and, why is that??!
  8. piezoe


    What paper trade platform were you using?
  9. what is Randy Howell's claim to fame so far as coaching traders?

    I would rather have George Soros or Richard Dennis than some charlatan; someone who has actual done it. This guy's website shows no credentials to understand markets.
  10. jokepie


    if risk is driven by PnL, then their risk management is still in kindergarden. Risk management should be in the trading style. Risk tolerance when calculated prior to the trade is too immature. It needs to be more dynamic.
    #10     Nov 1, 2011