Trading Psychology Series
The mental shift that separates consistent traders from emotional ones.
Why This Mindset Changes Everything
One of the biggest psychological cornerstone in a trader’s career is the shift from expecting probabilities vs outcomes. It might look simple and easy but many traders fail to really separate these two very different perspectives on the very same results. The most difficult part of being a trader is to cut their emotional decisions from the way of their trading.
They judge themselves on a trade to trade base.
Their mood is easily affected by a single trade’s outcome.
They second guess every trade they made.
If you want to become a professional trader, you will need to “zoom out” your perspective and not evaluate each trade individually, but look at your trading journal as a whole. For that, you will need to rewire your mindset so your execution gets more consistent and so that your evaluation of your performance gets on a more macro level.
In this article I will discuss why thinking in probabilities is so difficult, how an outcome focus is detrimental to your performances and practical cues to help you fix that.
Core Concept: Psychology vs Outcome Thinking
Outcome Thinking
It simply means that you evaluate your results on a micro level or trade per trade. It means when you have a winner trade, it’s a good trade and a loser a bad trade. It really feels intuitive and satisfying but this is not the big picture.
Probability Thinking
Now on the other hand there is a more macro view, the view from where you look at the trades as a process, the one where you look at results on a statistical perspective. It starts with defining a good trade by its execution. Was that trade executed following all my rules? Yes!?! good trade! No!?! bad trade!
The more macro perspective is the one where you look at your results on your journal after the month, evaluating your trade execution and the average number of pips. You can see if you encountered a losing streak, how it affected your psychology, and believe me it will! You can see your winning streaks as all positive, they are profitable after all, but the downside is can get you overconfident. These are all too common and this is where this mindset shift is coming into play.
Why the Brain Resists This Shift
That’s the challenging part for so many traders and this is normal. Your brain is wired to react to stimulus such as cause-and-effect. We are used to have our actions predicting the outcomes and this is just not going to happen in trading. Our brains wants certainty, immediate feedback and emotional closure. Trading is a matter of probabilities and it by definition uncertain.
How Outcome Thinking Hurts Trading Performances
Example 1:
When a trade you executed perfectly ended up with a loss, your brain might feel frustrated, self-doubting and it might even already want to change the system you’re trading. Nothing went wrong, losses are part of that statistic you planned ahead for. What matters the most is the average after a good sample of trades executed.
Example 2:
Let’s say you break your rule by chasing a setup or even use overleverage, just this one time, and it wins! You might react to that outcome with a confidence spike, reinforcing your rule-breaking behavior or believing that your intuition is superior to your system. That example is very dangerous as losses are a part of the trading process and you will either end up with a massive loss or even facing odds that were not planned ahead. The outcome will be negative for your career.
Example 3:
When you start trading, the first reflex is to evaluate your performance trade by trade. While this is normal, this behavior will lead you to a confidence that fluctuates greatly from day to day further leading to emotional fatigue. Traders behaving that way will take ore revenge trades, and it will overall degrade the quality of your execution.
How To Train for Probability Thinking
Reframing The Narrative
The first advice will sound obvious to you and will probably feel weird but bear with me. You need to replace the “was this trade good?” with a “was this trade executed by the rules?” and actually say it out loud to start. That phrasing will remove the outcome perspective all at once and will only accept the process as a quality check. If done correctly and consistently this one works wonders.
Journaling Properly
The first step to get better at trading is to methodically journal and enter data. The better the information, the better the improvements. So instead of taking some time to evaluate each trades individually, make a review weekly or even monthly depending on your trade frequency. Make sure you highlight the trades that were not executed according to plan and assess the reason why. This will be your main metric.
What I like to do is to score my steps, let’s say your system needs 4 things to line up before the entry and 1 thing for the exit. Give yourself 1 point for each rule you checked and make an average out of it. Your average should be 5, if not, you should improve every time you are doing the exercise.
The “100 Trades Mindset” Drill
Now that you reframed your quality assessment and journaled properly. Another step to take is to do the assessment after 100 trades. Make sure you observe your metrics and compare them to the results your system is supposed to deliver.
New to Trading?
If you are building your foundation as a trader, this kind of content comes in handy when your framework is already structured.
In my Essentials of Trading course, I am offering a solid base and foundation to start a successful trading career. You can start Here:
Probability Thinking in Algorithmic System Trading
If you are trading an algorithm or even an EA, you might believe you’re ahead of this. Unfortunately for you, this is not the case. This is actually very common, especially with new traders.
Here are the pitfalls:
- Stopping the system in case of a drawdown.
- Changing the settings of your indicators to match recent results.
- Modifying stop-losses or take the profits early.
The only thing automation does is taking care of the execution, with no error. It will not prevent you from doing any errors. You still need to plan ahead the boundaries you are ready to work with before going live.
Predefine Statistical Boundaries
- Acceptable drawdown, based o your research, you may accept a drawdown a bit higher than the backtests results.
- Losing streak lengths as well has to be within a certain range. Don’t forget that your system had losing streaks when you tested it.
- Define a timeframe where you will assess the performance of your system, this could be anywhere from 3 months to 1 year.
Separate Research from Execution
The most important is to keep a demo account open for tests and such. With demo accounts that never expire, you can keep these accounts for a very long time. Remember that the demo account is where you improve your algorithm while the live account is where you execute your plan, flawlessly.
Trade the Distribution, Not the Movement
Trading will reward the ones who can detach their emotions to the execution of their strategy. Regardless of single trade outcomes. Thinking in probabilities will make you more resilient, less likely to take the wrong decision and will keep your psychology at check.
The market is not sentient, it does not care about you and your trades. To get to the professional level you need consistency and a solid mindset.
Remember to trade the process and let the probabilities do the work.
