“You are most vulnerable just after you have scored.”
How true. Extending that quote into our trading lives, it is possible to conclude that we are most vulnerable after a trade – whether it is a winner or a loser.
As a new retail trader (unless you come from a risk management background), the tendency after a good win is to scale up your position on your next trade. After all, you’ve just had a trade that was correct. You probably even got the entry perfect to the pip! So you forgo your plan (not the trading strategy part, but the part that details performance monitoring). You scale up. And maybe for a few more trades, you’re on a winning streak. So you continuously scale up. But what happens when you take a loss? You find yourself slipping back down – and doing so very quickly. This is because you’re jumping the gun. Your confidence has turned into complacency. Your ego is your biggest downfall. Imagine you started the streak trading 1 lot, risking 10 pips for a reward of 30.
That’s fair enough, Michael. But how does this work when you’re on a losing streak? I will tell you. Say, as a new trader, you have just lost two in a row. You have been sticking to your plan and your first two trades haven’t quite worked out. You are now 20 pips down. But you are adamant that you will end the day on a positive. So you increase your stake. You scale up your next position. So instead of accepting the loss and sticking to your plan, you chased the markets. As they say, all streaks come to an end. You chased the gains and the gains evaded you. You are now 3 positions down and worse still, you scaled up on the third. Imagine the same scenario as above, but for a losing streak.
As I said in a recent post on Instagram, “skill wins battles – discipline wins wars”. This is true in all works of life. When a warrior goes to war, he/she will be faced with many battles. He/she can be skilled enough to defeat the enemy in any of those battles but will fail if he/she does not act with discipline. Discipline is following the strategy put in place before the confrontation. Lao Tzu said “the one that wins the battle makes calculations in his temple before the battle…for to win 100 victories in 100 battles is not the acme of skill”. Discipline tells the General what battles to fight and how to fight them.
As a trader, our strategy and plan is vital. It is the difference between success and defeat. The plan tells us to minimise our losses but also to accept them – because they will happen! So to avoid the vulnerability attached to winning (or even losing), it is essential to attach in your plan, a specific set of criteria that must be met for you to scale up positions. If my criteria were to be tabulated, it may look like this;