The BEST Way to Handle (and overcome) a Trading SLUMP
Summary
TLDRIn this insightful lecture, Jared Wesley addresses the inevitable challenge of trading slumps, emphasizing the importance of understanding statistical probabilities and maintaining a disciplined mindset. He shares personal experiences to illustrate how past losses can impact current trading decisions and stresses the value of sticking to a well-thought-out plan. Wesley also highlights the significance of reviewing trades, managing risk, and maintaining realistic expectations to navigate through slumps and winning streaks effectively.
Takeaways
- 📉 Understanding and accepting trading slumps is crucial as they are an inevitable part of trading.
- 💡 It's important to differentiate between investing and trading, with the former being a long-term strategy.
- 📈 Historical data suggests that markets tend to increase over time, making long-term investments generally profitable.
- 📝 Keeping a trade tracking spreadsheet and reviewing trades is essential for understanding and improving trading performance.
- 🧠 Psychological factors, such as fear and previous losses, can significantly impact decision-making during a trading slump.
- 🚫 Overreacting to a losing streak can lead to poor decisions and should be avoided.
- 🎯 Sticking to a well-thought-out trading plan, even during a slump, is key to long-term success.
- 📊 Understanding statistical probabilities and win-loss ratios can help traders manage expectations and reactions to market fluctuations.
- 🤔 Reflecting on past experiences and learning from them is important for personal growth as a trader.
- 🔄 Recognizing when a trading slump is ending and returning to normal trading behavior is part of the recovery process.
- 📋 Maintaining a systematic and robotic approach to trading can help minimize the impact of emotions on trading decisions.
Q & A
What is the main topic of Jared Wesley's lecture?
-The main topic of the lecture is how to overcome a trading slump, which is a common experience for traders.
Why is understanding statistical probabilities important for traders?
-Understanding statistical probabilities helps traders to not overreact during losing streaks, as they can recognize that such events are within the realm of normal trading experiences.
What does Jared Wesley suggest traders do when they experience a slump?
-Jared suggests that traders should review their trades, understand their expectancy and probabilities, and not overreact. They should stick to their trading plan and rely on the odds.
How does Jared Wesley relate the concept of a trading slump to a sports analogy?
-He uses the analogy of a baseball hitter going through a slump, where they start consciously thinking about their batting stance and technique, which were previously subconscious.
What is the significance of the 5-day losing streak that Jared Wesley experienced?
-The 5-day losing streak was significant because it was the worst in 10 years for Jared, affecting his psychology and leading to poor decision-making in subsequent trades.
What does Jared Wesley advise traders to do when they have a winning streak?
-He advises traders to maintain a systematic approach and not to overcomplicate the trading process, even during winning streaks, to ensure consistency and avoid emotional decision-making.
Why is it important for traders to track and review their trades?
-Tracking and reviewing trades help traders identify mistakes or errors, understand their performance, and make informed decisions based on actual data rather than emotions or assumptions.
What is the role of a trading buddy or accountability partner in a trader's process?
-A trading buddy or accountability partner provides an external review of the trader's actions, helping to identify any missed errors or areas for improvement that the trader might not see on their own.
How does Jared Wesley define a good trade versus a bad trade?
-A good trade is one where the trader follows their plan and executes trades based on their strategy, even if the trade ends in a loss. A bad trade is one where the trader deviates from their plan due to fear or other emotions, leading to poor decision-making.
What is the concept of 'reversion to the mean' in trading?
-Reversion to the mean is the statistical phenomenon where extreme values in a set of numbers tend to be followed by values closer to the average. In trading, it suggests that after a series of losses, the trader is likely to experience a return to more average or positive results.
Outlines
📈 Introduction to Trading Slump Lecture
Jared Wesley of Live Traders introduces the topic of overcoming a trading slump, a common experience for traders. He emphasizes the importance of understanding statistical probabilities, batting averages, and the psychology behind trading. Jared shares his own recent trading experiences, including a successful trade on Microsoft and the emotional impact of a losing streak, highlighting the need for a structured approach to trading.
📉 The Difference Between Investing and Trading
Jared discusses the distinction between investing and trading, using a personal anecdote of a trader who suffered significant losses. He stresses the importance of long-term investment strategies and the dangers of short-term trading without proper knowledge or strategy. Jared advises the trader to invest the remaining capital and walk away, emphasizing the need for patience and understanding in the market.
🔄 Trading Psychology and Recent Losses
Jared delves into the psychological effects of recent losses on trading decisions. He describes how a five-day losing streak affected his own trading psychology, leading to premature exits from trades due to fear and anxiety. Jared uses specific trade examples to illustrate how past losses can influence current trading decisions, even when they are not rational.
📊 Analyzing Trading Performance
Jared provides a detailed analysis of his trading performance, including a review of specific trades and the outcomes. He discusses the importance of sticking to a trading plan and the consequences of deviating from it due to emotional reactions. Jared also reflects on the impact of a recent winning streak and how it can lead to complacency and poor decision-making.
🎯 Handling Trading Slumps
Jared offers advice on how to handle trading slumps, emphasizing the inevitability of such periods for all traders. He suggests reviewing trades for mistakes, maintaining a long-term perspective, and understanding the statistical likelihood of losing streaks. Jared also discusses the importance of money management and the potential pitfalls of trying to recover losses too quickly.
📉 Understanding Expectancy and Probability
Jared explains the concept of expectancy and probability in trading, using the analogy of a baseball player's hitting streak. He illustrates how understanding the statistical likelihood of winning and losing streaks can help traders manage their expectations and reactions to market fluctuations. Jared encourages traders to adopt a probabilistic mindset to avoid emotional reactions and maintain a systematic trading approach.
📝 The Importance of Tracking and Reviewing Trades
Jared stresses the importance of tracking and reviewing trades to identify patterns, mistakes, and areas for improvement. He discusses the benefits of having a trading buddy or accountability partner to provide an objective review of trades. Jared also highlights the need for traders to understand their own trading statistics to stay grounded and avoid overreacting to market movements.
Mindmap
Keywords
💡Trading Slump
💡Psychology and Mindset
💡Statistical Probabilities
💡Batting Average and Win-Loss Ratio
💡Money Management
💡Reviewing Trades
💡Accountability Partner
💡Expectancy
💡Reversion to the Mean
💡Overreaction
Highlights
Jared Wesley discusses overcoming trading slumps, a common experience for traders.
He emphasizes the importance of understanding statistical probabilities and win-loss ratios in trading.
Jared shares his personal experience of a trading slump and the psychological impact it had on him.
He differentiates between investing and trading, advising long-term perspective for the former and short-term for the latter.
Jared highlights the importance of sticking to a trading plan, even during a slump.
He shares a specific trade example where he exited early due to fear, costing him a significant profit.
Jared discusses the impact of previous losses on a trader's psychology and decision-making.
He provides advice on how to handle a trading slump, including reviewing trades and maintaining a long-term perspective.
Jared emphasizes the importance of not overreacting to a losing streak, as it is statistically expected.
He explains the concept of 'reversion to the mean' and how it applies to trading performance.
Jared shares his own trading statistics and how they help him manage expectations during slumps.
He advises traders to track their trades and review them regularly to identify and correct errors.
Jared stresses the importance of having a trading buddy or accountability partner to review trades objectively.
He discusses the impact of batting average and win-loss ratio on the frequency of trading slumps.
Jared provides a baseball analogy to explain the statistical likelihood of winning and losing streaks in trading.
He emphasizes the need for a systematic and robotic approach to trading to minimize emotional risk.
Jared concludes by encouraging traders to learn from their experiences and improve their trading strategies.
Transcripts
hey guys Jared Wesley here of live
Traders and it is that time of the week
it's lecture time guys this week we're
going to be talking about how to
overcome a trading slump why because
this is something that every single
Trader has been through there is not a
Trader that's traded ever that hasn't
gone through a trading slump okay so
it's a very important topic to talk
about I think there's a lot of things
that you guys don't understand about
your trading that we're going to talk
about today statis itical probabilities
batting average win loss ratios what a
good trade looks like what a bad trade
looks like what you do after a losing
streak what you do after a winning
streak how different your psychology and
your mindset is I mean this is a big
time lecture that encompasses a lot of
stuff guys it's a good one and I would
stick around for it all right if you
like the videos click that like button
smash Hammer that subscribe button I am
Jared Wesley of live Traders let's get
to
it
this week's lecture topic
is how to handle a trading slump it's
something that we have all had every
Trader that's been trading for more than
a few days has had a slump and often
times they're
unexpected and often times they come
after some of your best moves uh we get
a little bit ahead of ourselves and we
think our doesn't stink and we're
really just that good um and then boom
the market slaps you silly right brings
you back pulls you back to reality um
and uh the question is how do we handle
it uh because sometimes trading slumps
carry on after the slump is over and
that's something we're going to talk
about here right when a slump ends
you're still jaded right you're still
scarred from the slump um and and that
can have an adverse effect on your next
five or 10 trades until things go back
to quote normal uh and so we're going to
talk a little bit about that today and
how you can how you can handle it and
some of the things uh that you you might
want to do to to get yourself out of a
slump as well all right but before we do
that and I have to admit this is a
rehash this is a rehash but uh when will
the insanity stop oh my gosh stock
market losses how do y'all cope I've had
a terrible 8 months in the market from a
peak of 340 my account is now down to 88
Grand with zero cash to use um ouch you
know how are others dealing with this
downturn feeling really sad earlier I
wouldn't think before spending two or
three grand and stuff now I think about
even dinner for 80 bucks guys the first
thing here is this there's a difference
between investing and trading right and
this person when you go from 340 to 888
Grand you have to ask yourself how did
you get to
340 right think about what I'm saying
this person's clearly not understanding
how they got there they either got there
through dumb
luck
or yeah dumb luck that's it right they
got there through dumb luck or dumb luck
that's pretty much it uh you can read
this whole thing down more than 200
Grand uh money which would have been
nice to use well think about it all that
stuff I feel so behind my friends and
peers some of them who got lucky as they
never invested in the market and some
others who pulled out last year to buy
houses guys just listen to this for a
second reread that sentence I feel
behind my friends and peers some of whom
got
lucky mirror
anybody anyone hand this man a
mirror this person needs a mirror
because they think other people are
getting lucky and this person by saying
others got lucky you're kind of implying
that you got unlucky right that you got
unlucky I'm doing great with all the
knowledge I think I
have I don't understand you don't have
any knowledge you got lucky and you
don't know you're lucky you don't have
knowledge okay you think you have
knowledge you're the most dangerous kind
of person the person who thinks they
know but they don't know right so
anyway you have to understand there's a
difference between trading and investing
and investing is a long-term thing
trading is a shorter term thing now can
you trade yearly charts monthly charts
sure you can all right um but if you're
talking about investing guys I want you
to take a look at this and this is for
everybody all right I showed this slide
I think I showed this in professional
wealth building strategies and I showed
this also a couple years ago in 1921 the
Dow was at 64 okay the Dow peaked it
wasn't 38,000 it's higher somebody can
tell me what the Dow peaked at and I'll
put it in here but the Dow peaked at
over over 38,000 in January of 2024 okay
Cliff remembers that well you remember
kind of right o anyway that's a
590 fold increase $11,000 is $590,000
right where will it be in 2032 2042 52
62 Etc where will it be the most
reasonable answer is higher so when I
tell you guys invest in the market I'm
telling you that because I know 10 years
from now 20 years from now 30 it's going
to be higher than where it is today
there are very few exceptions in Market
history where that isn't true so when
you invest you're setting up your future
when you invest in real estate you're
setting up your future
stop having such a shortsighted view of
the world and realize that good things
take time okay so invest I don't care if
it's $10 a month you take some money
okay take some money and invest it all
right because at some point you're going
to be 5 years older than today and 10
years older than today and 20 years
older than today and you'd probably
rather have more money 20 years from now
you know not only so you can have a
better life but also in is going to eat
into some of that stuff as people have
seen recently so this is to the person
who got very lucky on the last slide
take the 88 Grand you have left put it
into the market and walk away you're not
going to get rich quick you're not as
good as you think you're lucky you're
not very good you're a gambler and you
don't realize it anyway let's dig into
this so do you guys
remember oh was it yesterday let me see
when was this that two days ago okay all
right I took micros oft on a pretty good
play here all right wide range Red Bar
followed by a narrow range resting bar
and then our trigger bar right here
which is a fairly standard 5 minute
three bar play I called this trade in
the room okay I got in at 41780 my stop
loss was
41980 um and well I'll be honest I got
out for a small gain okay you can see
here uh at one point I was up about a
th000 bucks on this thing and uh long
story short it moved down about half of
an hour and then it proceeded to go all
the way up pull back up and right here
right here it came 11 cents from my stop
loss and then chopped around pulled back
chopped around and then ultimately hit
Target full Target was like
41575 or something like that 41580
something like that that was full Target
okay that nervousness cost me $2,000 and
here's the crazy part I only had a half
position on this if I had a full
position that nervousness would have
cost me
$4,000 why because as the market went
lower Microsoft was struggling to go
lower and it chopped around and went
against me and all this but the plan is
the plan and this is what this is a
lesson I want you to understand yaroslav
I'm talking to you and everyone else I'm
talking to you the plan is the plan
you put the plan together when you were
calm cool and collected and then as soon
as the battle starts you start throwing
your PL out the window and then and then
you get out and you're like I knew I was
right I knew I was right literally as
this thing was coming back almost about
to stop out I was literally happily yes
I'm being honest with you guys happily
pulling up my trade tracking spreadsheet
getting ready to chalk this up as a loss
right you know how you do your back
testing and forward testing I was
getting ready with a little face
grin oh I'm going to chalk this bad boy
up as a loss look how much money I saved
that was my thought process look how
much money I saved not dude you're an
idiot for breaking your plan that wasn't
my thought process my thought process
was look how much money you saved well
then it came all the way back down to
hit Target who's the idiot now right
who's your daddy so this is one okay
this is one
then you guys remember this trade this
was last week okay I think it was Friday
this is a little one minute breakout
coincidentally also on Microsoft that's
just coincidence and it's pretty nice
you get a wide range green bar Little
Red Bar wrestling you just kind of hang
in this range so 41650 was the entry
4450 was the stop loss I gave it a lot
of room like I typically do for most of
my trades right and that looked pretty
solid okay wait
wait what happened the stock popped up
maybe a dollar something like that
pulled all the way back I got nervous
and I exited a break even costing myself
two grand now I put this picture on the
right hand side so you can see exactly
what I was looking at because this right
here is really this right here right
that's that same area Okay um that line
is off a little bit isn't it won't let
me straighten it out oh well there we go
all right so point I'm making is I got
out exactly where you're supposed to get
in right I took the breakout and it
popped but the retracement was deeper
than I liked I was hoping the
retracement would stay on the red line
right that's what I was hoping right but
it went deeper than that
and
I got out now right now everybody in the
world that's looking at this slide is
going why did you get out you're an
idiot dude that thing did nothing wrong
absolutely completely totally nothing
wrong it broke out it pulled back it
didn't even get anywhere remotely close
to your stop loss my stop- loss was down
here at 14
4450
this thing went down to 4116 it wasn't
even
close now why the F would I do something
so
stupid anybody why would I do something
so dumb I mean it looks pretty dumb in
hindsight doesn't it it looks really
stupid in hindsight in real time you're
like getting nervous and flustered and
all these like oh my gosh it popped up a
dollar it's pulling back it's pulling
back it's pulling back it's pulling back
what the heck is going on blah blah blah
blah blah blah blah right now you guys
aren't thinking that way you're not
thinking that way cuz you can see the
future right you can see the forest
through the trees but the why the F did
I do this
why no one
knows well fear is definitely the heart
of the problem but what caused the fear
that's the heart of the problem but what
caused the fear
why would I get upset about a stock that
goes 50 cents below break even why it's
nothing I held on to freaking meta today
and that went like 20 cents from
stopping
out
Stacy Stacy Stacy Stacy has the
answer why did I do
this why did I do this let's take a look
let's take a look
okay here's a turnaround bar on
Shopify stopped me out by seven cents
and then it
worked here's a
trade oh here's
Microsoft anticipation stop Snooki me in
at like 4795 and then just stopped me
out okay and by the way this was on
February 2nd this was on February 6th
this is another one here on Amazon uh
here's one that we got in right there
another anticipation stop right right
there triggered me in one penny at the
high of the day pretty decent little
play too right and then just boom rolls
over boom another stop
out oh wait I'm not done yet here's Nike
here's a stock
that kind of broke
out got in here stupid bad trade just
stupid bad trade right this is what a
dumb trade looks like do you guys see
where I'm going with
this Stacy has the answer the answer is
previous recent
losses I took
five five consecutive down
dayss I don't remember the last time I
had five consecutive down dayss that's
how long it's been it could be 5 years
10 years 50 I don't even know I I can't
even give you an answer that's how long
it's been so what's my point what am I
making what's the point I'm making when
you have something that is either never
happened to you or extremely unusual
highly unusual happen to you what does
it do to your
psychology what does it do it messes
with it doesn't doesn't it it's like a
baseball hitter going through a slump
what do they do when they get to the the
Batters
box they start thinking are my feet in
the right position are my hands in the
the right spot am I leaning over the
plate too much things they never thought
about before things that were just
subconscious before now they're
consciously thinking about it it's like
a basketball player who's 0 for 10 and
they're wide open for the game-winning
shot and they pass the ball we've seen
that happen before in pro sports right
they're two for 10 or one for 10 they're
shooting bricks and they're wide open
for the game-winning shot and they pass
the ball Why recency by
it got to you the market got to you
right so we take a look at it and go
okay here it is I broke it down for you
I had a five-day losing streak worst
streak in 10 years okay and that's Ben
Simmons all the time Jordan right 5-day
losing streak it's the worst in it might
be longer I don't know I don't know how
long it's been during the losing streak
during the 5-day losing I had two
anticipation stops and I had two stops
on the penny that eventually
worked I wanted to get out of a trade
that looked bad but I stayed in per my
plan you guys remember the Microsoft you
guys remember the day where I asked you
I actually literally this is how jaded I
was you don't ask other people if you
should follow your plan the answer is
always of course you follow your you
don't ever ask somebody should I follow
my plan I asked the chat room should I
stay in Microsoft or get out do you
remember when I asked you guys that like
a week and a half
ago and you guys most of you except for
one person said yes stay in guess what I
did I stayed in I stayed in and guess
what happened it stopped out I stayed in
and it
stopped and I thought you knew it wasn't
going to work but your plan is your plan
so and on top of wanting to get out and
stopping out and on top of two
anticipation stops and on top of two
stops that happened in less than a
nickel I also took a bad trade on Nike I
took a really boneheaded bad trade on
Nike
okay I had two days where where I
started the day up and ended down
started day up 2500 bucks and I ended
down I followed my plan during this 5day
slump except for the bad
trade that was a bad trade I did
anticipation stops I took them proudly
stops that were a nickel or so that
eventually worked proudly took them
wanted to get out of Microsoft I stayed
in it I stayed in it okay I follow my
plan pretty well I don't really recall
doing anything outside of it other than
the bad trade I was
frustrated so what
happens now think about what I'm saying
here think about what I'm saying
here both of those trades that I took
let's go back let's go back this trade
on
Microsoft this was my second trade of
the
day this trade on
Microsoft was my second trade of the
day what do you think happened on the
first two two trades on those days on
those two days both of these were the
second trade of the day different days
second trade what do you think happened
on the first trade any
guesses first trade of the day
was
were nobody's got a
guess Stacy Says
losers
you're all wrong except for Derek they
were
winners they were
winners they were
winners so why did I get out of the
second trade too
soon because of this I had two days
where I started the day up and ended
down and I said to myself
Jared after five losing days in a row
you got to feel a victory here you have
have to feel a win so when I started the
day up five grand and Microsoft started
looking like it wasn't going to work and
I realized I could go back to break even
today and I already had two days where I
started up and ended down
psychologically my mind was playing
games with me I'm sitting here saying
five effing days in a row you were R and
now you you started the day up we've
been here before twice you started up
and finished down I'm not going to do
that again today so I took the second
trade and it didn't go in my favor
immediately the way I wanted it to and I
got nervous and said you know just take
the money and run just take the five
grand and walk away well I should have
taken s or
$8,000 instead I walked away with
45 because of what happened during the
slump it hadn't left me yet it was still
lingering right and that's what that's
what slumps are right right we do the
wrong thing what you're
look when you're going through a
difficult
stretch the only thing you say to
yourself is come on Market throw me an
olive branch throw me a bone throw me an
olive branch right that's all you're
thinking just give me one good trade
throw me an olive branch I don't care if
it's a good trade or I just get lucky
just show me a little bit of love and
what does the market do it shows you
love and
abundance I tell you this all the time
no matter how bad you mess
up the market will always give you an
opportunity to fix it always give you an
opportunity to fix
it well guess what the market did for me
after that five day slump gave me six
consecutive winning trades until
today was my first losing trade so I'm
six for seven since the slump and today
I started with a winner and I still made
money today but it showed me six
consecutives showed me 30,000
worth of winning
trades
okay the market gave me everything I
asked for you know what also happened
reversion to the
mean I don't have five down days almost
ever so of course you should be on a
streak of well I'm on a streak now of
four up dayss and that should probably
continue till I get to 7 to
10 where am I going with all
this well couple things one everyone
will go through this everyone will go
through a trading slump okay some
people's slump is two days sometimes
it's two weeks sometimes it's two months
okay some last longer than others but no
Trader is perfect will go through slumps
okay experienced or novice you'll go
through it statistical probability
guarantees at some point you'll have a
slump so how do you handle this
inevitability and that's the key word
here let's let's highlight this in
yellow okay how do you handle this
inevitability it's not an if it's a when
it's a guarantee you'll go through a
trading slump it's a 100% guarantee no
one is immune to it if you're really
good your slump will be shorter than
someone else's okay exactly it's not
what happens to you it's how you react
so when the market threw me the Olive
Branch I didn't react properly I reacted
mostly right mostly right but not
entirely right
so of the 30 grand the market gave me
offered me I only took about 23 Grand of
it well that was good because it was
enough to get me out of the slump and
back on the top back in the green again
right but I cost myself Seven
Grand because I knew better or because I
didn't want to have another day where I
was up and went to break even or went
down I didn't want it to happen I wasn't
at that moment in time I wasn't acting
logic ically I wasn't just saying hey
don't worry about it your plan will
bring you out of this reversion to the
mean will happen I wasn't acting that
way I was basically saying I don't care
I just want to feel
good I don't care I just want to feel
good and here's the irony and I've said
it to you guys many many many many times
here's the
irony in feeling good in the moment you
end up feeling worse in the long
run the instant gratification that you
experience is way
worse or I should say isn't as as good
as the long-term pain does that make
sense the long-term pain you'll feel
after the
fact weighs on you much heavier than
that short-term
gratification and this is what I I'm
trying to impart in you guys so that
when you have a slump and assuming you
review things we'll talk about that in a
minute assuming you review things some
people just don't even know why they're
having a slump they're just like ah they
throw at the wall and hope it
sticks that's not that's not a good
Trader okay you have to understand
guys see this this happens this is
all on the same day by the way this was
all on the same day run three bar play
shake and bake PayPal three bar play
shake and bake and then it worked JD
three bar play shake and bake and then
it worked do you know how effing
frustrating days like this are if you
have an 84% play in your plan then
you're probably okay but what if you
don't you're three are down and two of
them worked your three are down and two
of the three trades
worked and this is one of the reasons I
use wider stops now as well entry here
stopped out entry here stopped out entry
here and then PayPal worked and JD
worked you're going to have those days
and no one cares except for you no one
cares those say yeah sorry to hear that
Brian sorry to hear that Jordan no one
cares until it knocks on their
door so know that when this happens the
opposite will happen as well you'll have
trades like today Microsoft we had a $2
stop loss and it held our stop loss by
like 20 cents or 30 cents it pulled back
some 80 90% and held our stop
loss sometimes they'll stop you out by
5% 10% by a nickel by a dime
okay
you getting tired of getting emails Jeff
I'm just messing with you so obvious
things to do obvious things to do review
your trades to see if you made any
noticeable mistakes that that's obvious
right go back and take a look at the
trade you took and let's be honest
you're not going to know the trade you
took if you don't track the trade you
took okay did you follow your plan did
you do anything stupid or foolish take a
really bad trade like Nike okay did you
get caught on the wrong side of the
market meaning did you take a good trade
on the right side and maybe a news
report came out maybe something very
unexpected came out like news right what
does your trading buddy accountability
partner have to say oh I don't have one
of those why not you don't want to have
a third party or second part of review
your trades see if there's something you
might have missed review your work okay
how this happened or has sorry has this
happened to you before and then the
answer you got to ask is if yes what did
you do right if yes what did you do and
then if nothing comes to mind then you
got to ask well then
what right then what if nothing comes to
mind meaning if you followed your plan
you didn't do anything stupid you didn't
really get caught on the wrong side of
the market or least it wasn't your fault
your trading buddy looks at it and goes
I don't see anything wrong with
this what do you do so let me give you a
scenario you you've lost six trades in a
row over 3 days okay what should you do
on the fourth day use a lower risk maybe
half
Lots take the day
off double your risk to get your money
back o oh that this one people are like
oh yes yes Jared it's number three it's
number
three limit yourself to only one trade
do nothing different does the answer
change for novice vers professional
Traders everyone's like number three
number three I'm stuck number three this
is the answer double your risk get your
money back it's definitely not this one
right it's definitely not this one but I
want you to take a look at this before I
give you the answer just take a look at
this really think about it and then
think about what have you done in the
past when this happens to you well we
already did that right we're back here
Felix right that's the slide before did
you follow your plan did you do anything
stupid did you make any noticeable
mistakes right we've already done that
now okay we're making an assumption that
people have done this right and now
you're like well what do I
do implant an AI chip in your
brain that's the answer Jordan has it
cuz Jordan's always right except for
like a week or two ago when he got two
wrong which is like that was like me
having five down Jays Jordan getting two
things wrong was like whoa whoa assuming
you are within your money management
limitations and you figured you're
taking good trades like you you didn't
find any egregious
mistakes you do nothing you've done
everything you're supposed to
do and the odds just weren't with you
like we talk about all the time if you
have a 50% batting average you're going
to lose five trades out of 10 it just
you don't know the order in which you're
going to lose those five trades they
could be the first five trades over that
3-day period we just talked about then
it's it's a problem isn't it but if you
go winner loser winner loser winner
loser winner loser winner loser it's not
a problem is it cuz you're up every day
you're actually up 5 days in a row but
you went winner loser every day if you
went loser winner loser winner loser wi
you're still up but if you went loser
loser loser loser loser now all of the
sudden your mind's playing gymnastics
with you your mind's going something's
wrong something's wrong well why is
something wrong why does something have
to be wrong if you bat 50% you're going
to lose five out of 10 you have no idea
in which order that's going to happen so
why does it have to be wrong it there
might be there might
be but we already nip that in the butt
by going over all your trads okay yes
that was like what three four years ago
in August something like that time flies
but it was you're right he was down 14r
and he ended up the month slightly above
water you're right it's true Jordan but
most people weren't here then and don't
have that recollection so
scenario if you win on reduced risk you
aren't helping yourself okay then go
back to losing again when you raise your
risk back up chasing your tail this
happens this is Murphy it's like all
right I'm going to lower my risk and
then you have a five trade winning
streak you're like all right I'm ready
to raise my risk again and then you go
back into the losing streak and you're
like what the right the Market's just
got you chasing your tail on a hamster
wheel if you limit yourself to one trade
perhaps that's a very giving trading day
so you're taking three trades on the bad
days and one trade on the good day if
you double your risk you could dig a
deeper hole right and that's what a lot
of people unfortunately do you know why
it's like a climactic they're like it
can't go any lower that's what that's
the psychology people like it can't get
worse yes it can you've heard the
expression the market can stay
irrational longer than you can stay
solvent so while you might be down seven
trades in a row it's absolutely possible
you could be down 10 trades and if you
double your risk it's like being down 13
trades right taking the day off could
work if you really need it that could
work but again you could be missing out
but if you really need it because your
mind's just messed up then take the day
off thoughts your risk should be small
enough that none of these slumps have a
major impact on your account or your
psychology right batting average and win
Ross ratio have a huge impact on the
prevalence or frequency of these slumps
read the second part your batting
average win loss R your expectancy has a
massive impact on the prevalence or
frequency of these
slumps guys if you're a three All or
Nothing Trader you're going to see five
losses in a row rather frequently
frequently like almost every month not
exaggerating almost every month you'll
have a five trade losing
streak almost every month okay but if
you're doing one RL or
nothing that shouldn't happen nearly as
often right have you ever given it any
thought as to the
likelihood statistical likelihood of an
extended losing streak given your style
of trading and I bet you the answer for
most people is no no and it goes back to
this simple thing do you treat this as a
business are you just hacking away at
this thing hoping it's going to work out
for you do you see where I'm going with
all this trading buddies reviewing your
trades videotaping yourself filling out
a trade tracking spread journaling all
your trades knowing what your expectancy
is all those things most people don't do
that like to 90% of Traders don't
do any they think just because they have
their p&l written down at the end of the
day that they're tracking their stuff
they're
not so when this happens they really
don't know how to fix it because they
don't have anything to fall back on
right they don't have any statistics to
fall back on or odds to fall back on so
let's use this
example many of you know who this is
some of you don't Mike Trout is a great
baseball player right baseball player
one of the best okay Mike Trout at the
time of this which is I don't know a
year ago or so is a 303 career hitter
that's his career batting average 303 he
hits
safely in 71% of his games so AB means
at bats at bats if he has one at bat the
probability of a hit is 302 okay percent
of Trout's game started 1 2 okay meaning
almost all of his games that he starts
he has more than one at bat as in like
99% of them
98.8% two at bats that's about 11 or 8%
of his games three at bats 30% four at
bats 45% but take a look at the
probability of a hit one at bat two at
bats three at bats four at bats five at
bats six at bat look at seven he's had a
couple games in his career where he's
had eight at bats eight
when he has eight at bats there's a
94.4% chance he gets a hit when he has
one at bat there's only a 30% chance so
the more swings he gets the more
likelihood he gets a
hit guys where am I going with
this like Jared that's great so that's
obvious okay
well the more swings that you guys get
the more trades that you take
is a higher
likelihood of a winning streak or a
losing streak the more Trad you take
there's going to be a higher likelihood
that you have a five trade 10 trade
losing streak it's less likely if you
just take five trades then if you take
5,000 trades right A F trade losing
streak over 5,000 trades is almost a
guarantee five trade losing streak if
you've only ever taken five trades is
pretty slim so let's take a
look now this gets a little you know a
little mathy for you this is where you
know people like OE love this stuff
beating Joe demaggio's 56g game hitting
streak okay beating his 56g game hitting
streak for those of you who don't know
Joe deio look him up okay it's the
longest hitting streak in major league
history so using 717 right how
frequently he gets on base and 56 games
our formula giv us a
0.0025% chance of Mike Trout recording a
56 game hitting streak in 162 Game
season
okay or about 1 in 3.9
million 1 in 3.9 million
okay you can read this for comparison a
true Talent 302 hitter has about a 1 in
780,000
780,000 chance of hitting 400 over 500
bets okay with a probability that low
even simulating a million Seasons with a
true Talent 302 average and trouts at
bat distribution might not show any any
successes which is in fact what happened
I repeated the SIM for another million
seasons and ended up with one successful
streak you're like Jared I'm lost man
what are you talking
about I'm relating this to trading and
you'll see in a
second the odds of Mike
Trout having a 56 game hitting streak
are literally in the millions okay 3.9
to be exact
okay so that's pretty much off the table
for him does that make sense it's pretty
much impossible for for all intents and
purposes right in reality
speaking in
trading what does it look like for you
right how many days how many trades
sorry how many trades a day do you take
one two 3 10 what's your management 1 r
two R three R do you follow your plan
get out too soon stay too long what
other factors might affect the losing
streak okay hold
on so
now if you have a 50% batting average
then
statistically you will have four heads
in a row at least once every 16 attempts
now again it doesn't have to happen in
that order three in a row once every
eight
attempts okay obviously there is more to
trading than that
but it does show the high likelihood of
a losing streak with only a relatively
small number of
Trades I mean to lose four in a row
potentially or win four in a row
whatever okay once every 16 trades is
basically two or three times a month
potentially right with a 50% batting
average potentially you just don't know
in which order it's going to
happen okay so what's the lesson don't
overreact the OD odds are the odds if
you understand the odds it will help you
not to overreact see overreaction would
be if you had a Joe demaggio season as
Mike Trout that would be an overreaction
because you'd be like holy this is
one in4 million but if it's
like one every 16 trades that this is
probably going to happen then that's
completely within the realm of normaly
it's not outside the realm of normaly
it's actually
expected and if you know it's expected
why would you overreact because you know
it's expected it's when you don't know
it's expected because you don't know
your expectancy your odds and your
statistics that's when your mind starts
to play games with you now don't get me
wrong you might know it's expected and
your mind could still play games with
you but it's easier to accept it when
you know it has a real possibility of
happening right of course you might be
doing something wrong which is why it's
always a good idea to have your trades
reviewed but losing streets can be very
common depending on your approach
particularly your target goals three
four five R you're going to have a lot
of losing streaks so let's take a
look winning and losing streaks hit rate
Max likely losing streak Max likely
winning streak let's take 50 trades in
this case
okay you have a 10%
chance okay of a 37 trade losing
streak on 50 trades
okay think about that if if your hit
rate's 10% right if you have a 10%
batting average right let's say you're
doing 10 R All or Nothing hypothetically
10 are all or
nothing you have Max likely losing
streaks 37 in a row if you have a 10%
batting average okay now let's go to 50
because that's what I was talking about
if you have a 50% batting average
and you took 50 trades let's call it one
month 50% batting average 50 trades your
max likely losing streak is six trades
your max likely winning streak is six
trades does that make sense so if you
start getting near those areas four five
six even seven you start going there's a
good chance assuming cuz Ali talks about
this too assuming consistency assum
assuming you're not just throwing mud at
the wall right that your losing streak
should be close to finished and you
should hopefully move into a winning
streak soon but if you have a lower
batting average let's call it 30% maybe
you're shooting for four our targets you
could have 11 trade losing streak once a
month it says likely Max likely losing
streak so again if you're shooting for
say four hour or nothing and maybe your
batting average is like
32% it's a good there's a good chance
you're going to have a 10 trade losing
streak every month every
month and your Max winning streak might
only be three but those three trades
also make 12 R don't
they understanding the expectancy and
probability is an important part of what
calming yourself down
mentally because if you go in and you
truly believe something that is
statistically inaccurate you're likely
to do something stupid let's say you
truly believe that with a 30% batting
average the biggest losing streak you
should take is three let's just say in
your heart for whatever reason you
believe that a three trade losing streak
is the worst it should ever
get well your expectation your thought
process is not in alignment with
statistical
reality and therefore when it happens
and you have a five or six or seven
trade losing streak you might start
ripping up apart your trading plan going
this doesn't work this is wrong and
you're sitting there going wait it's
well within statistical probability that
this could happen it's actually done
nothing wrong do you see the different
thought process whereas if you know the
it's it's likely possible you're going
to well I don't need to change anything
I'm I'm within the bounds of
reasonableness but if you believe it's
not you might start tearing everything
down and changing everything when in
reality you might be ahead of the game
you actually might be doing better than
the statistical reality you don't even
know okay so I just brought this up
because I just wanted that you guys to
think about that over the course of a
year I'll take 500 trades well if I have
a 50% batting average over the course of
a
year there's a likely chance I'll have a
nine trade losing
streak so use the 500 instead of the 50
because this is for me about an average
year 40 trades 50 trades a month
somewhere around there but I take some
time off so it averages probably about
500 a year give or take so if I bat
60% there's a likely losing streak in my
future of seven trades in a row there's
also a likely winning streak of 12
trades in a
row so the middle one here is more
likely for most people throughout a year
so if you start looking at this and you
think holy I am doing like three R
All or nothing and I'm shooting for a
40% batting average I am probably going
to have a 12 trade losing streak at some
point during the
year
probably prepare for it you
know exactly right the process is out of
your control it is what it is but you
can take pre-planned action to correct
it or at least mentally understand it
okay it's important
guys this stuff happens nothing terribly
wrong with these trades Bam Bam Bam stop
stop stop and then two of them
worked take it on the chin that day what
if you took six in a row like this just
got to go back to your sheet and go okay
well I'm 300 trades into the year I bet
60% and I lost six in a row oh wow okay
look at that I'm kind of within the
realm of reality now it doesn't feel
very good and I'm frustrated but it's in
the realm of
reality right it's not insane if you had
a 90% batting average and you had seven
losing trades in a row then that might
be
different that might be
different okay it's about adopting a
problemistic probabilistic mindset to
remove emotional risk yes exactly right
exactly right Kirk but here's the
problem Kirk most people don't know they
just don't understand the likely
probability and possibility of these
things happening to them so when they
happen they're completely Gob smacked
they are literally shocked like this is
impossible
why you're not as good as you think you
are and given your batting average the
probability suggests it's reasonable and
you think it's impossible right so I
hope that you guys have learned a little
bit about probabilities and statistics
as they relate to winning and losing
streaks and I hope you've also learned I
hope I've imparted in you that trading
is a mind and that how things
happen matters but it shouldn't I went
through a 5-day losing streak and it it
absolutely affected my winning streak I
still won on all those trades I just
didn't make as much money as I should
have because my mind was playing mental
gymnastics with me going I just don't
want to take the
loss well that's a problem because now
I'm breaking process when you break
process you mess with Statistics when
you do that you generally cost yourself
money so our goal is to be be as
systematic as robotic as we possibly can
I am not saying you're perfect and you
will make some mistakes we all will and
that's fine but we need to limit the
number of mistakes we make as much as we
possibly can and also stay reasonable
about what is happening that means
review your trades check your tracking
spreadsheet talk to other Traders really
get a good understanding and sense of
what you have done and if you look at it
and go I've done what I'm supposed to do
it just didn't work work then fall back
on the odds if you find a mistake or an
error then correct the mistake or an
error but you have to track your trades
and review them to know that it was an
error okay don't over complicate the
business track your trades review your
trades have someone else review your
trades do all of those
things and then rely on the odds but to
do that you have to be a consistent
Trader who takes consistent patterns all
right and knowing your stats so I hope
that this lecture was helpful for you
guys I hope that you learned something
and I hope you'll take some of this
moving forward the next time you're
having a slump or a winning streak
because it works with that too hey I've
won 10 trades in a row but statistically
you know Eight's like the max likely
okay well you're probably getting a
pullback soon like I just took six
winning trades in a row I had a loss
today that's statistically in the realm
of reasonable possibilities right we go
back baton 60 70% where are we up Max
winning streak eight trades okay okay
well I had six pretty close so I hope
you guys learned a bit hope that you'll
be better Traders because of it I'm
Jared Wesley of live Traders we'll get
back at it again next
week oh
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