The hidden dangers of cherry-picking trades

There’s a ‘Golden Phase’ of trading that can happen right at beginning of your journey.

It’s where you don’t really know enough yet to have any expectations or feel any kind of frustration.

It’s a strange kind of pure state where you totally focus on the mechanics of placing the trades, and not be too worried about the outcome.

And typically, this is when you get some very good early trading results.

You know, by just pulling the handle on the trades and seeing what comes out the other end, like we all should be doing!

(By the way, if you could only bottle this carefree frame of mind and resell it back to traders a few months further down the line you’d be a millionaire in short order!)

I think you subconsciously accept that you’re just learning the ropes at the beginner’s stage.

There’s no pressure from your ego lurking in the background, nagging away telling you that you should be doing better, that you should be getting your trades ‘right’ by now, damn it!

And it only seems to be when you get a bit of experience under your belt that you start to form preconceived expectations from your trades.

And that’s when the problems can start.

So what’s at the root of the issue here?

A lot of it just comes down to the way our brains are wired. We naturally look for patterns and connections between events. This is the kind of stuff your in-built survival mechanism does for you.

Toddlers soon learn, for example, the result of touching a hot radiator. The brain connects the action of touching the object with the painful sensation it receives as feedback from the nerves in the fingers. A connection is made and a preconceived result is attached to that pattern of events.

So imagine a trader… he’s seen a pattern of events create a particular result on a previous occasion – a crossover of moving averages was seen before a big surge in price for example – so it’s natural for the pattern recognition software in his brain to expect the same result again.

And it’s understandably infuriating (and a blow to his preconceptions) when it doesn’t happen.

Probability Vs Guarantee

The moving average pattern can certainly be seen as an ‘indicator’ of future events. It can suggest conditions that tend to precede an upward movement in price are in place. But it’s no guarantee. Many other factors can come into play that simply did not occur on that first occasion. The moving average pattern can be used, but only as a sign that the PROBABILITY of a move to the upside may now be greater than a random 50:50 split.

So let’s put this into a slightly different light. Let’s say some pre-trade analysis has been done and 5 potential opportunities are on the table. Patterns have been recognised that suggest a better than random chance of price movement in the trader’s favour. The trader has his working materials. It’s now time to put them in play.

Now it’s common at this stage for traders to cherry-pick only the best one or two trades. They have five on the table so why not select just the juiciest looking fruit?

There may be reasons for doing this. But by doing so it’s throttling the results you might expect to see from a larger sample size.

But what if the trader simply took ALL the trades that fulfilled his criteria?

We need to switch mindset here. We need to move from one that seeks accuracy – predicting which trades are going to ‘win’ thereby proving our pattern recognition right- to a mindset that plays the probabilities.

And when you play the probabilities, you’re going to see the expected edge of your campaign materialise much clearer once you have MORE trades under your belt, not less.

The effect of more not less

Take two, three, five trades and you can still lose on them all. The edge in probability was still there so they were good and valid opportunities. It’s just these particular trades were some of the ones that didn’t work out in your favour.

Take fifty, a hundred, two hundred trades, that all had a probable edge, and you’ll have a better chance of seeing the overall per-trade result you might have expected.

But the result can only shine through once you take it as an AVERAGE on the greater number of trades. That’s after all the winning trades and all the losing trades have each been tallied and taken into account.

Just to be clear… you can still approach your campaign in piecemeal fashion, taking one or two trades from all those that made the cut. That’s perfectly fine. All it means is your larger sample size of trades will be stretched out over a longer period of time.

But all things being equal, and if you want faster results, when 5 trades fit the bill why not take them all?

It’ll get you that workable sample size quicker, and that means you’ll see the expected results quicker too.

Until next time…

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