On the face of it, you may be thinking ‘predicting’ a trade or using ‘if/then’ set up means the same thing. However there is a subtle, and in my opinion, a hugely crucial difference between the two. And it can have a huge impact on your trading…
So let’s get right to it. The majority of the time you speak to traders, when you ask them what they do, they will reply “I try to predict which way the markets will move, and I buy and sell according to that prediction”. You could argue that that is a fair way to sum it up when describing Trading to someone else. But if we really think about it, is it the best way to go about defining our trading?
Personally, I take slight issue with this, and here is the reason why. Have you ever thought about what you are saying to yourself when you are ‘predicting’. Think about it. When you predict something, what is the first word that you use…?
Got it yet…?
‘I’ predict that GBPUSD will go up…
‘I predict that EURUSD will go down….
‘I’ predict, ‘I’ predict, ‘I’, ‘I’, ‘I’……
The point I am trying to make, is that when you predict, most people will immediately personalise. When you personalise something, you immediately have some form of attachment to the outcome. In order to be successful at anything that you do, you need to be able to make the right decisions at the right time. When we are attached to something, immediately our vision becomes clouded. If we have a subconscious bias to a particular outcome, then our brains will automatically skew any data that we see, even if it is pointing to an outcome opposite to our prediction, in an effort to convince ourselves that ‘we are right’. Essentially our brains are protecting our ego’s from being bruised, because if you think about it, if our prediction doesn’t come true, we are wrong…right?
So why does this happen? The reason why is due to a phenomenon called ‘Cognitive dissonance’. This is where we feel uncomfortable or unpleasant emotions based resulting from believing two contradictory things at the same time (Investopedia). In relation to trading, let us assume that you have taken a position in GBPUSD. You have ‘predicted’ that GBP will strengthen thus you have taken a long position. However what can happen is if the trade starts working against us, rather that react to the prevailing market conditions, we start ‘searching’ for information that will help confirm our initial prediction, and essentially prove us ‘right’. By cutting our trade short and taking a loss, we are confirming that we are wrong, so we search harder for certainty in our prediction to avoid cognitive dissonance – in effect, the trader marries the trade.
You will have no doubt heard the phrase before of ‘don’t marry a trade’. Essentially what this means is don’t become attached to any trades that you take, to be indifferent to the result. The reason that this is important is rather obvious. Markets are unpredictable, and are always throwing curve balls at us. Thus what we may have envisioned happening on a particular trade, on many occasions will not happen. Thus we need to be in a sound state of mind and free of any emotional attachments to react to changing market conditions and make the best Trading decisions. We need to be flexible.
Marrying your trades can be quite a destructive trap to find yourself in. However it is rather easily avoided. When analysing potential trade setups, rather than thinking about ‘predicting’ what you think will happen, start thinking about each potential trade using if/then statements.
- If scenario A unfolds, then I will go long.
- If scenario A does not unfold, then I will not go long.
- If after going long, price does not form a Higher high and a higher low, then I will exit the trade
- If price does form a HH and HL, then I will stay in the trade and trail my stops.
- etc. etc. etc.
Firstly, this method helps you plan out your entire trade from start to finish. You know exactly what you need to do whatever scenario develops before and after you entry. Secondly, and perhaps most crucially, your ego never comes into this scenario. This method is almost mechanical, in the sense that for every event there is a set response. Nothing is left to question, and not once have you exhibited any form of emotional attachment in your wording or thinking.
I personally physically write out my if then statements for every trade. As such, very little surprises me when I take a trade, and whether it works in my favour or not, I am never questioning what I need to do. I have it ‘pre-agreed’ in written form, as an instruction guide to follow as shown in the example below.
This is a trade I took on GBPNZD in February 2019. As you can see from the chart I was initially short, and at one stage was in a +1R profit. However because of my If/Then scenario’s that I had pre-written, I knew exactly what I was looking for if the trade was to work in my direction, and what I was looking for as a sign that it was not working. In this particular case, not only was I able to close out the trade for scratch (opposed to a -1R loss – or if I was married to it, potentially a lot worse) but I actually had enough conviction to reverse the trade, and I was handsomely rewarded with a +3R banked trade on the long side.
Now some people will no doubt say “yea but you were wrong”. To those people, I would just say you are completely missing the point. Even though I was +1R up on the short at one stage, I was indeed overall wrong on this particular trade idea. But do I care? Not one bit. Because it is not about my ego, it is not about being right or wrong. It is about executing your Trading process diligently and effectively which I did. So even if I had not taken the long, and just closed the short for a scratch, it is still a win for me.
The key takeaway from this, is when you are wrong, to lose as little as possible, so that when you do get the trades where you are on the ‘right’ side, you will benefit even more so than you would if you are prone to large losses. By using If/Then statements, you are giving yourself clear instructions, thus leaving very little up to ‘interpretation’.
You have a plan for every trade, and as mentioned before, your actions become almost mechanical, as you have already come to terms with what you need to do in any scenario that arises. This could be taking a -1R loss as pre-planned, or perhaps closing out a loser sooner if events dictate you to do so. If could also mean trailing your stops rather than closing your position, as your ‘IF/THEN’ statement for exiting a position has not been hit yet, thus allowing you to ride larger moves for longer without any emotional attachment.
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