Module 12 Innerworth — Mind over markets

Chapter 87

It’s How You Play the Game That Matters

The old saying, “It’s not whether you win or lose but how you play the game” is especially relevant to trading. Many novice traders work under the assumption that winning is all that matters. But winning over the long term eludes many traders. Sure, you might win over the short term, but it’s difficult to continue winning. Winning requires discipline. It is vital to have a clearly defined trading plan and to trade it. If you trade by the seat of your pants, you won’t trade consistently and you won’t accumulate profits.

How do you approach trades? Do you try to follow a detailed trading plan or do you rely on luck and hope that all your trades work out the way you want? If you rely on fate, you may pay a psychological price when it comes to your discipline. Making a quick profit without a trading plan may provide a short-term pleasure, but these kinds of winning trades can adversely influence discipline in the long term.

Rather than developing a well-defined trading plan, following it, and getting rewarded by trading it, an undisciplined trader puts on a trade haphazardly and is coincidently rewarded. In this case, a lack of discipline is rewarded, and this unjustified reward may increase a trader’s tendency to abandon trading plans in the future because he or she has been rewarded for doing so in the past. However, the positive outcomes are usually short-lived, and a lack of discipline ultimately produces trading losses.

It’s useful to distinguish justified wins from unjustified wins. A justified win is when a trader makes a very detailed trading plan and follows the plan. A win that results from following a trading plan is justified and reinforces discipline. An unjustified win occurs when a trader doesn’t make a plan or drifts from the plan. He or she may be rewarded, but the outcome occurred by chance. The win is unjustified and can reinforce undisciplined trading.

Cultivating discipline is vital for profitable trading. Trading is basically capitalizing on chance. One implements proven trading strategies, over and over, so that across a series of trades, the strategies work enough to produce an overall profit. It’s like making shot after shot on the basketball court so as to accumulate a winning number of points. The more shots you take, the more likely you will amass points. But the winning player is the person who first develops the skill to make the shot consistently so that at every possible opportunity, the ball is likely to go through the basket.

To a great extent, consistency is key. It’s the same for trading. One must trade consistently, following a specific trading plan on each and every single trade (the plans are different, but some sort of plan is used each time). This allows the law of averages to work in your favor so that across the series of trades, you will make an overall profit. Don’t let unjustified wins interfere with your ability to maintain discipline. Follow your trading plan, and reinforce the idea that if you follow your plan, you will end up with profits in the long run. If you abandon your trading plan and get an unjustified win, you may feel good in the short term, but you’ll pay a long term price when it comes to your ability to maintain discipline.

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