Good analysts are not always good traders [Principle vs Emotion]

#TommyLecture #PrincipleofTrading #TheoryofTrading #Emotion #Management

Hello traders from all over the world. This is Tommy.
How were your trades lately? The market was quite unpredictable recently showing high level of fluctuation which makes it harder for us retail traders to follow up. It sort of seems like a sideway trend in a big horizontal box but also within that, it also keeps surprising us time to time by showing extensive bullish or bearish rallies at unexpected price and time zones.

In this foggy arena, we traders make decisions to minimize risks based on strict criteria and standards of our own. Whether you are a long-term holder, a swing trader, a daily trader, or a scalper, we must take at least some risk for reward(return) and there is no complete risk-free strategy, market, or product in this world. Despite all these uncertainties in the market, as long as proper risk reward ratio and win-rate are secured in every trade, traders eventually will end up profiting theoretically and this is what makes trading different from gambling. To some people, what we do might seem like gambling on certain direction of trends and price action zones, but it surely is different from that we deal with numbers and consistency based on a highly reliable source called ‘Technical Analysis’.

Since all of us are humans carrying emotions, we often tend to narrow our sights desperately expecting only the best scenario. We easily get disturbed just by thinking about the unwanted results or potential losses and ignore the risks that we have to face every time. However, there are thousands of possible scenarios that can happen, and the market is not always on our side. Just remember that there can only be two possible outcomes for every trade we take; we either win or lose.


There is nobody on Earth who can win every trade maintaining 100% win-rate (Even you, Elon Musk!). Whether you like it or not, we are destined to encounter circumstances when market is just totally not on your side and if you are a wise trader, you would normally admit this very situation as soon as possible. Just because market did not flow as expected, it doesn’t mean that you suck trading. Good traders are not the ones that win every single trade but are the ones that can maximize their profit when market is on their side and minimize the losses when market is against their side. Nevertheless, there are some traders, many actually, who just hate to admit the fact that they are losing during position and they start to let their emotions kick in. Unfortunately, now or later, these types usually end up being in worse situation.

In this world, establishing and following consistent principles is much more important than analyzing the market (TA or FA). No matter how good you are at analyzing market, if you keep breaking promises to yourself, you eventually won’t be the survival in this market. I have seen so many traders thriving but end up losing all their money with just one tiny mistake. Always keep in mind that there are many traders who win 99 times and lose everything just by one simple mistake, letting their emotions be involved. Emotion in fact, is the biggest risk here.

For example, if you designed your stoploss and target price, execute your trade as you have planned. Don’t change your mind being agitated by lowering your stoploss or exiting position before reaching the target price. Also, if you have set your daily profits and losses, do comply! I have seen so many traders who could not just admit their loss and become irrational, insisting to take more trades and eventually losing much more. You should be familiar with calling a day if the maximum loss for the day, week, or month has been reached. I know very well more than anyone that you desperately want to recover all the losses and I even know that by 50% chance, you will successfully restore all the loss. However, by 50% chance you won’t. This terrible situation will seduce you to lose control, make biased judgement, and you will probably end up regretting.

Observing many of my fellow traders, students, and followers, I have performed some researches deeply about psychology and mentality of traders. When and where do most of the retail traders start to not obey their principles and in what process? Compared to the past, in recent market with numerous untraditional patterns and phenomenon, there are much more variables that easily lure traders to trade with emotions. In technical perspective, widening/broadening pattern, V-shaped bounce, long-tailed candle, double SR flip and master pattern, etc. are some of the major occurrences that weren’t quite common in the past. From these unfamiliar price momentum and flow, traders are highly likely to lose their temper and break their principle especially when they face these cases: stoploss hunting, bull/bear trap, target price missed closely, entry price missed closely, and breakout entry hunting, etc.


To illustrate in depth about the fundamental process why emotions are regarded as poisons when trading, I developed a simple model that depicts the relationship between trade setup phase and performance. In this world, ideally, if we can manage emotions perfectly like robots, our trading performance (profit or loss) should not affect the trading preparation/setup phase (Designing EP, SL, TP based on the deducted trend) and thus it would be a causal relationship where an independent variable (preparation phase) affects the dependent variable (performance) only in one-way. However, the more we let emotions kick in by breaking our principles, the more it becomes correlated between these two variables. In other words, as we fail to control our emotions, the performance will no longer be independent, and start to affect our judgement when setting up our next trades, either positively or negatively. This will eventually create a vicious cycle where factor A affects B, B affects A, and A affects B again, getting worse and worse just like sinking into a swamp. Therefore, as a wise trader whose task is to manage risk, it is integral to be able to cut this cycle before things get worse. We should know how to stop with a small loss, before it becomes a big loss due to that cycle.


Hence, it is extremely critical for us to properly design and obey the strategies consistently and carefully and regardless of the latest trading outcome, we should be as neutral, objective, and prudent as possible. Which set of principles, strategy, and mindset should be adopted to effectively eradicate emotional trades? I hate to say this, but the answer would be different depending on your trading preferences and your economical/technical/physical conditions. So first you need to know yourself. Here’s a fun fact; this thing called ‘trading’ lets you learn deeply about yourself that you did not even know before. Pretty cool huh? It explicitly lets you know how greedy, fearful, doubtful, and jealous you are under this social system called capitalism.

Once you find out about yourself through decent self-reflection, you then need to figure out your trading propensities and the strategies you are fond of. It is definitely going to be different for everyone. For some traders, a high RR ratio & low win-rate strategy might suit and vice versa for some else. Some long or short, some short-term or long-term, and some high or low leverage. It is significant to find the optimal combination of trading strategies, theories, and indicators as well as trading products and platforms, that fits your trading preferences and behaviors.

To give you a tip, make habit to always consider the risk first, before the reward. Consider the status when you lose money rather than thinking about the profit. In this way, you will naturally get a sense of weighting risks that you are facing. By prioritize risk over rewards, you will be less affected by negative emotions when you actually lose trading and will also help you efficiently manage your risk in advance.

Let's all become a wise and smart trader who are always prepared for the worst possible scenario. Remember, it’s not the win-rate that makes you a successful trader. It’s all about minimizing loss and maximizing profit. Thanks for reading my post.

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