Jim has just made nine winning trades in a row. He feels as if he has his methods down and can trade profitably under any market condition. Some might say that Jim is a little overconfident. He’s almost certain that his next few trades will be winners. He is so sure that he hasn’t even considered the possibility that he may face a series of losing trades. This is when overconfidence can get the better of a trader. It’s essential to map out all possibilities and take necessary precautions, both psychologically and financially.


Many novice traders let their discipline lapse after experiencing a series of winning trades. It is as if they are thinking, “What do I have to lose? I’ve made enough profit. I can take a little more risk.” The problem with this mindset is that your series of wins may have been just a matter of capitalizing on probability, and in all likelihood, the next series of trades may be losers. If you act impulsively or don’t continue to manage your risk, you’ll give back all your profits and more. It’s vital for your long-term survival to continue to manage risk, even after a long string of successful trades.

Taking precautions by considering all possibilities also has a psychological advantage. After making a series of wins, it’s natural to feel a little elated, high, and invincible. One may not fully consider the realistic possibility that a losing trade is on the horizon. An unexpected defeat is often more devastating than an expected setback. Many people react to unexpected losses with extreme emotion, which may cloud one’s judgment, and produce trading errors. By considering all possibilities, on the other hand, one will be ready for the possibility. Such preparation will lessen the impact of a loss, should one experience it.

It is useful to take considering all possibilities to an extreme. Mentally rehearse what you will do for all possible market conditions and trade outcomes, regardless of whether you think they are likely or not. If you are overly prepared, you can more easily control your emotions should you encounter one of the possibilities. Map out all possible market conditions, all possible price patterns, and all possible adverse events. Carefully consider how you might react to each possibility. Indeed, it is useful to write down what you might do under each situation and event. Don’t be caught off guard. Consider every possibility and have a detailed plan for how you will react. A little preparation can go a long way in helping one achieve profitability and maintain it.

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