I’ve come to believe that the true underlying purpose of having a trading plan and accepting randomness are really just tools to help mitigate the impact of emotions while trading.
Common emotions are typically Fear, Greed and Over-confidence.
Fear of Losing
- Was the trade avoided even though all of the plan criteria were met? Was the trade avoided because recent transactions were losers (see Accepting Randomness)?
- Was the stop-loss moved closer (and not in accordance with the plan rules) to minimize the potential loss?
Fear of Being Wrong
- Was the stop-loss increased to avoid exiting a trade that is currently losing?
Greed / Over-confidence
- Was the target increased (and not in accordance with the plan rules)?
- Were trades entered when the plan criteria are not met because I did not want to miss out on potential profits?
- Was the trade size increased prematurely (and not in accordance with plan rules)?
If I start to make any of the mistakes above it’s a clear signal that I need to take a step back and review the trading plan.