Every trade is atomic

All physicist scream now “THIS IS NOT WHAT ATOMIC MEANS”. Whatever ladies&gents. Welcome to my blog.

Every trade you take is an independent event. It has nothing to do with the trade you took previously and it will have nothing to do with the next one. You take it because you want to pay the market for an opportunity to execute your statistical edge and potentially make a profit. One individual trade however, will not make you rich. And if you are doing it right, it will not ruin you either. You should feel nothing in fact. Act like a robot.

You may have all the stars aligned and the opportunity might look like the best one ever but you have no real idea what the market is up to. Nobody does. Maybe Apple is going to buy a few billion EUR in the next second, because they need it for some crazy business idea. Maybe the next war will start in a second and whole world will panic and start buying the yen. Who knows. That is why your risk management is one of the most important components of your strategy. If you take a loss, it’s just a small fee to pay for an opportunity to win big.

Treat every single one of your trades as a totally independent event, with an uncertain outcome, which you don’t care about all too much. What you do care about are the combined outcomes of 100s of your trades, because this decides if your edge is profitable or not and you should care about this one, a lot. One single trade means nothing, it’s merely a blip on your equity curve.

What happens if you don’t, and you start linking your trades? Say you are in a losing streak, you lose a trade, then another one, and another one. Now you think, ok, I lost 3 trades in a row, something is wrong. I will risk 1/4 of what I usually risk so that if that trade is also a loser, it hurts less. Or even worse, I will tweak my system. What will then nominally happen is that this particular trade is a big winner, just that you cut your profit in 4. Now you get confident again, your edge is back in play, you risk twice as much as you should on the next trade to recover. And PAM. Your drawdown just got a lot bigger. If you changed your system you cannot objectively compare the last two trades it to other trades you lost and everything gets blurry and subjective.

Even if you have tested your strategy and you know it is profitable, you will have losing streaks. Get used to the idea that you might at some point take 10 losses in a row. That still does not mean that your strategy is broken. I know that mentally it is really difficult to handle for a long time but it will get easier. The more you exercise, the easier it will get, especially if you do not link the trades and continue treating them independently. Taking valid losses i.e. trades that fit your plan but run into your stop, is a good thing. A good thing because you followed your plan, and you got a bit closer to the next win, that will come for sure. It is fundamentally important to keep executing your strategy even if you take losses.

Markets are a mirror that point at all your mistakes without mercy and the slightest touch of empathy. Yet another good reason why the majority of traders fail.