This is Why You CAN'T Follow Your TRADING SYSTEM Rules

Have you ever found yourself taking too many trades and jumping into positions because of a fear of missing out? Or on the flip side, have you talked yourself out of taking a trade and hesitated to pull the trigger? Welcome back everyone. This is the third lesson in the mini course on high performance trading, and we're talking about two really common trading problems. But before we go any further, I'm going to ask you a question that will be one of the best predictors of whether or not you will succeed as a trader. If you flipped a fair cling 10 times in a row, what are the odds of getting five heads and five tails? If your gut instinct was to say 50, 50 or 50% like the vast majority of people do, you are spectacularly wrong and sadly, you are very unlikely to ever succeed as a trader. Don't take that too personally or negatively. It can be fixed, obviously, but we do need to be honest if we're ever going to get to the root cause of our struggles. The there's actually only a 24.6% chance of doing five heads and five tails. It's not even close to 50 50, and that comes as a huge surprise to most people. You may be there scratching your head thinking I'm nuts, but if you don't understand those odds, you don't understand trading. Trading is a game of probabilities, but the human brain has never needed to think in those terms, so it has no mechanism of understanding them intuitively. I'll come back to this later in the video, so just sit with that for a moment. For now, let's look at the problem of overtrading and under trading and you'll see how probabilities are involved in both. Your reason for entering a trade should be based on your system, which should tell you the type of trade you're looking for, what the market conditions should be like, how indicators and other filters should appear, etc. But a system doesn't guarantee what will happen next with certainty. It merely advises on probabilities of what is likely to happen. And the very nature of dealing with probabilities naturally leads to a degree of uncertainty and requires discretion and judgment on your part. Even rigid mechanical systems are open to some level of interpretation, and as such you will find that your decision to enter a trade or not comes down to how confident you feel about it. So what is it that makes a trader over trade and take more trades than their system advises? Well, there are three main reasons. The first is our familiarity with exchange in time for money. In just about every job or task through all of human history, the more we do, the more we have to show for it. Trading doesn't work like that. You only get paid when the market conditions are favorable to your particular system. You can't force the frequency or the quantity of profitable opportunities. That's down to the market, and it's a very unfamiliar situation to get used to. It's typical for traders to sit in front of a chart and feel compelled to do something. It just doesn't feel natural to sit there and do nothing. A second reason you might over trade is because you fail to adjust to change in market conditions. For example, the market may have been in a period that is excellent for your system, with frequent and profitable opportunities, and you have been very active. But then the market slows down and there are fewer opportunities. Now think of driving a car. When the road opens up, it's easy to step on the accelerator and speed up in response, and we soon get used to that increased speed. But when traffic slows us down, we can get impatient and the new slower speed seems exaggeratingly even painfully slow. And the same thing can happen to you in trading. As the market ebbs and flows, it's easy to increase our trades as the opportunities increase. It's much harder to slow down when the market slows down. And the third reason for overtrading is most relevant if your account has been doing badly, is in drawdown, or you've recently taken a big loss. As you will recall from the previous two videos, when we're behind, we're much more likely to recall positive outcome trades we entered that went in our favor, which start to get strangely optimistic and take more risk. You become risk seeking when you're behind, so there's a much greater tendency for you to feel confident about entering more trades than you should be. Your brain will trick you based on how it prioritizes and recalls past memories. If you haven't seen my previous two videos, please please use the link in the description to the playlist so you can understand what I'm talking about here. So what can you do to remedy over trading? Well, most of the answers you need won't be clear until you've watched the later lessons in this course, especially lessons five and six. But for now, some things to consider are first, remember, trading is not like manual jobs. More trades do not need more money. You are not exchanging time for money. And although this seems obvious, remember it's your system that defines whether or not there is an entry opportunity, not your desire to either work harder or speed up your returns or get paid for the hours you've put in. Pay close attention to your system and go down your checklist to confirm whether or not a valid opportunity really is present. Third, be aware that it is harder for you to slow down than it is to speed up. If the market activity has legitimately increased and you have found yourself taking a greater number of valid opportunities, you need to be more aware and extremely sensitive to any slowdown in the market so you can quickly adjust. Number four, don't expect to get into a trade. When you sit down to trade, remember that you are not exchanging time for money. It's best if you trade in like fishing rather than hunting. Be patient and let the opportunities come to you. Number five, Remember that you are looking for good trades, not the best trades. And what I mean by that is all trades that you enter should score 10 out of 10 according to your system. And if the market conditions have recently been 1 out of 10, well, a 5 out of 10 will suddenly look amazing. But just because it's the best you've seen for a while, it's still a poor trade according to your system. And lastly, be extra vigilant after a loss or after a series of losses. Remember that we have a tendency to become more confident, more optimistic, and take more risks when we're behind. As I said, you will get more comprehensive solutions later in the course. But I need to give you the other lessons first for it all to make sense. But for now, let's move on to under trading or hesitating to enter trade. And this is much more closely linked to the question that I asked at the start of the video about probabilities. You will typically under trade and hesitate because of a lack of confidence in either your system or the trade opportunity. And again, there are three main reasons and the first is something that you are already familiar with from the first two videos. In this course, you may be playing it safe to protect what you already have. This is especially relevant if you've been on a recent winning street or you've made a new equity hein in your account. Remember, we become risk of this when we're ahead. I won't expand on that here because it's been covered in the last two videos, so please rewatch those if you need a reminder. The playlist link is in the description. But the next two reasons are new territory for us. First, you may be mistaken. In normal drawdown for system failure, new traders often expect smooth equity curves and understandably find it difficult to accept that there are periods of drawdown even when they're trading very well. In this case, your protection mechanism is acting like an oversensitive smoke alarm. It mistakes the natural series of losses for a glitch in your trading system, and that's when you might begin to hesitate or perhaps stop trading the system altogether. It's important to see this as a useful protection mechanism, protecting you from completely wiping out at times when something is genuinely wrong. This mechanism may be correct to slow you down, but in periods of natural or normal drawdown, it's a maladaptive system. And the third closely related reason is a complete distrust of your system after a series of losses. The next video in this course is dedicated to this because it is such a big topic, but but I'll briefly cover some of the points Now. It's easy to understand why a trader would hesitate to enter trade number six if the previous five have all lost, especially if the previous five were all perfect setups that matched our system rules exactly. When we get long strings of losers, we see it as a pattern and assume that something is wrong. And if we think something's wrong, we are likely to become very hesitant on entries, but distrust our system and be reluctant to trade. But remember, your system doesn't guarantee what will happen. It simply advises what is more likely to happen. Probabilities. And in truth, we simply do not understand probabilities, as you well know. If you answered my question that started this video incorrectly. In mathematical terms, probability has only been around for a few hundred years, and apart from mathematicians, the average person has never thinked about probabilities in their everyday life. It's something our brains are simply not used to. For most of us, trading is the first time we've ever been exposed to an environment that operates very heavily on probabilities. This really is a major issue in trading, perhaps the biggest issue. If you can't think in probabilistic terms, you cannot trade. It is as simple as that. But you'll find very few people talking about this. The rest of this course will go into much more detail on this, but for now, here are a few things that you can do to start managing it. First, be vigilant of your tendency towards risk aversion when you're ahead. If you've just had a winning streak or made new equity highs, pay attention to your desire to protect your gains. What we've talked about in the previous two videos when you do experience any hesitation or a lack of confidence, ask yourself, why is there genuinely a problem with my system? Are the market conditions poor or Is this just me trying to overprotect my account? You've got to ask yourself those difficult questions to snap yourself out of autopilot. Second, remember that under trading is not necessarily always a bad thing. This is a protection method and under the right circumstances it is essential. So what you should try to do is look through your trading journal and your history to recall previous periods in your trading where under trading was the right response and then conversely, recall periods where under trading and hesitation was inappropriate and the wrong response. Just like the previous two videos. What this is trying to do is recalibrate your memory recall so you can choose the correct response. Third, make sure you know very clearly what drawdown is typical for your system so you know what to expect. If you have no realistic expectations of what a normal drawdown looks like, it's very easy for you to misstate its small sling of losses to mean system failure. If you haven't done thorough research for what kind of drawdown you should expect, make that a priority before you do anything else. The next and the most important thing is to start making inroads to your understanding of probabilities, especially in relation to random distribution. With a coin flip the odds of any individual spin is 5050 and if hedge represented a win and tails represent a loss, you might expect to win one in every two goes. And that is true over the very long term if you were to toss the coin thousands of times, but in the short term the distribution is random and non uniform. Toss the coin thousands of times and you will definitely get streaks of 10 tails in a row. That doesn't mean the coin is broken, it's just the random distribution of results. Try it for yourself if you don't believe me. And just as importantly, ten tails in a row doesn't mean heads on the next hoss is more likely. The odds of the next horse are still exactly 50 50. Believing otherwise is a well known thing called gambler's fallacy. Casinos love people who don't understand probabilities and so does the market. In trading, regardless of your system probabilities, you will see streaks of losses that are simply there due to random distribution and nothing to do with a fault with the system or the market or you. That is just how probabilities work under trading is almost always the consequence of not accurately thinking about trading probabilistically and I'll go into much more detail on this in the next video and the rest of the course. I hope you've enjoyed this one guys and found it helpful. I know you haven't got all the answers yet, but it's a complex subject and I'm trying to condense it into bite sized chunks for easy consumption on YouTube. Things will be clearer by the end of the course. If you've enjoyed this, please give the video a like comment and share. And if you're not already a subscriber, please consider it. And of course, keep your eyes open for the next upload in the series. Thanks for watching and I'll see you next time.