Saturday, July 19, 2014

Recency Bias

Fear of taking the next trade??
Do not get affected by recency bias with a single or string of losing trades.
Winning trades will come later.

Stop focusing on your losses and profits, learn to trade well instead.
Do not manually close your trade, unless you have very good reason to do it or your system tells you.
Just do whatever your system tells you.

Stop over-analyzing too many variables, it will just do more harms than helps.
Every system has its own pros and cons.

1) Trust your guts and have faith in your system, do whatever your system tells you.
2) If there is no obvious trade, do not force yourself to take a trade.
3) If you are not confident in a trade, do not take it.
If you failed to do so, you are not much different from gambling.

For a system with very good RRR (Risk-to-Reward Ratio) 1:2 and above, it is very difficult to lose all of the trading capital.

Let's see.
Risking 5% of trading capital with RRR 1:2 per trade.
Win = 10% gain, Loss = 5% loss.

40 wins, 60 losses.
40 x 10% - 60 x 5%
= 400% - 300%
= 100% gain of your trading capital

53 wins, 47 losses.
53 x 10% - 47 x 5%
= 530% - 235%
= 295% gain of your trading capital

What if,
30 wins, 70 losses.
30 x 10% - 70 x 5%
= 300% - 350%
= -50% of your trading capital.

Wow!! It takes 100 trades to lose 50% of your trading capital.
Let's see if you are just risking 2-3% of your trading capital only?
And RRR 1:3, 1:4 or 1:5?
Do the math by yourself.

If winning rate 30% only, very obvious you have not found your trading edge or that system does not suit your personality.
 My advise is better to consider another system.


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