How many times have you been in a trade and thought to yourself “I think I’d better exit now”, even though the current situation didn’t fit your criteria for exiting a trade?
How many times have you entered a trade on a whim despite it not fitting your system, just because you felt serious FOMO after seeing the market suddenly gain momentum?
How many times have you moved your stop loss too early and got closed out of a trade unnecessarily?
Guess what, traders… It’s happened to all of us… many times!
I call this phenomenon ‘trading in the grey area’.
However, your trading system is your oxygen in the markets. It’s necessary.
Your Trading System = Your Oxygen
You shouldn’t be doing anything that doesn’t fall under the rules of your system. We have to stick with it through thick and thin.
If you’re not sticking to your system, you’re not creating a trading baseline and without that, you’re never going to be able to optimise your performance.
If you escape the ‘black and white’ of your system and enter the grey area — how will you know what’s going well or not?
Ultimately, the reason we step outside the boundaries of our system is because we think we know better than it. This leads to two possible conclusions which we will need to review:
- Our system needs to be adjusted, as there are certain flaws that we’re compensating for, when we trade in the grey area.
- Our system doesn’t need to be adjusted; the system is fine. The problem is actually us.
Conclusion 1 : Weakness in Our Trading System
If you think you’re trading in the grey area because of the first conclusion, then the solution is very simple: take some time out to review your system; fix the flaws and making it watertight once again.
Switch to a demo account and test the system until it’s doing what you would be doing in the grey area. Build rules, tools and criteria to bring the performance up to the level you’re expecting.
Conclusion number one was simple; but conclusion number two is where we should be concerned.
Conclusion 2 : Self-Sabotaging Our Trading System
As humans, we have a push-pull dynamic, subconsciously underlying all of our decisions. Pleasure and pain isn’t just saved for those Fifty Shades of Grey moments.
We’re pulled towards pleasure and pushed away from pain. And the understanding of what provides us with pleasure or pain is embedded in our own minds.
This should give us a simple solution for most things — we have to assign pleasure to the outcomes we want to happen and pain to the outcomes we don’t want to happen.
Unfortunately, things just aren’t that simple. There is an extra complication involved.
We have to contend with the fact that our short-term needs will often be in conflict with our long-term needs, from the pleasure-pain principle point-of-view.
This explains why we will often make short-term decisions that sabotage our long-term progress. If you’ve ever tried giving up smoking or going on a diet, you’ll know exactly what I mean; “just one!” directly translates to: “oh screw it!”
With that being said, when we break the rules of our system, it’s usually due to our short-term and long-term needs being out of sync.
Realigning Our Pleasure-Pain
In general, the need to push away from pain is a lot stronger than the need to pull towards pleasure.
This means in most cases, we will take the action that avoids pain, even if it means we sacrifice pleasure.
As traders, the battle in the short-term is usually to avoid the pain of feeling like we’ve missed out. We just can’t stand the feeling of missing out on profits we could have taken; even in situations where the opportunity was just based on a gut feeling. We all know that pain, right?
It doesn’t even cross our minds that if we’re wrong, we run the risk of having to endure a much worse long-term pain of knowing we broke our rules, traded in the ‘grey area’ and lost money.
And even if we’re right, we have the pain of not being able to optimise our trading system sufficiently, due to inconsistent results.
Instead we need to realign our short-term pleasure-pain principle to match our long-term needs.
Over the short-term, we should find pleasure in following our system, regardless of the outcome. It will show strong will-power, which we should take great pleasure in, as well as showing us we’re on track to making long-term progress.
Whatever the outcome of a trade, as long as we follow a system, we can analyse the results and optimise it to have a more consistently positive outcome in the future. This means following a system, whether good or bad, is progress.
However, if we break our system and trade in the grey area, regardless of whether we make a short-term profit as a result of it — we harm our long-term progress. And knowing that, should give us enough short-term pain to avoid that situation.
Detaching Ourselves from the Outcome
The most difficult part of making all this work, is how counter-intuitive it feels as a trader.
You see an opportunity and you’re certain it will make you money, but if it doesn’t match your system, you have to leave it alone.
That doesn’t make any sense, does it? You’re leaving money on the table!
That goes against the instincts of a trader!
But the reality is, our job as a trader is not to spot fantastic trading opportunities. Instead, we have two jobs: one is to create a system that works and the other is to stick to it.
As I always say, trading is a game of probabilities. If you don’t know your exact probabilities, and you’re trading instinctively — you may find that you’re actually trading into the hand of the ‘house’, just as a gambler does in a casino.
We need to detach ourselves from the outcome of individual trades. Being correct on individual trades is not the sign of a good trader; being able to follow a plan and have emotional neutrality is.
Remember, as a trader you’re a sniper in the market. Overthinking the outcome of your actions will lead to hesitation and disaster.
Detach yourself from the outcome, pull the trigger according to your plan, save the analysis and improvements for your debrief… and enjoy years of trading pleasure.