Trading Psychology: Rewire Your Brain for Maximum Performance in Today’s Markets
By Scott Redler
Chapter 4: The Myth of the Consistent Trader
Success isn't always about greatness. It's about consistency. Consistent hard work leads to success. Greatness will come.
One of the biggest benefits of serving as Chief Strategic Officer of T3 Live and T3 Trading Group is the amount of contact our organization has with traders at all skill and experience levels. We have surveyed thousands of traders about their financial goals.
99% of traders’ goals fall under the category of “consistency.” Traders either want to make a certain amount of money in a certain period of time (like $10,000 per month) or they flat out say “I want to be consistent.” So I’m going to guess that your goal as a trader is to be consistent in terms of P&L.
Here’s the problem. It is impossible to have a consistent P&L because things are always changing. Market conditions are never the same twice. The S&P 500 can go up 20% one year and drop 20% the next. And think about all the factors that can impact stocks. Earnings. Interest rates. Elections. Oil prices. Fed policy. Wars. I can go on for hours listing out things like that.
Do you really think you can crank out $25,000 a month like clockwork when things are never the same twice? You are far more likely to make $50,000 one month and $0 the next, then $25,000 for two straight months.
You’re also changing yourself. Your risk tolerance and attitude can be radically different from one month to the next, and over time.
In fact, consistent returns are so rare that they can be a red flag for fraud. One of the warning signs that Bernie Madoff was running a scam was the fact that his returns were so consistent!
So, I’m going to propose that you abandon the goal of earning consistent returns. Instead, I’m going to suggest you take up three alternate goals:
Goal #1: Engage in Consistent Behavior Every Day
You can’t control the market, but you can control your behavior. So commit to becoming a routine-oriented person that just comes in and gets work done. We’ll talk a lot about this in future chapters.
Goal #2: Make As Much Money As You Can When Times Are Good
When the market is in an uptrend and you are long the right stocks, odds are you will make a lot more money than you expect. So you want to milk a strong trend as much as you can.
Goal #3: Lose As Little Money As You Can When Times Are Bad
All traders, myself included, have losing days, weeks, and months. Anyone that tells you different is lying to you. So when the market turns against you, or you just go on a cold streak, focus on surviving and minimizing damage, NOT on achieving some predetermined dollar amount.
Let me use some math to explain my point of view. Consider two scenarios:
- Making $10,000 per month for 12 months straight
- Making $250,000 in the first 6 months of the year, and losing $30,000 during the last 6 months
In scenario #1, you’d make $120,000 with perfect consistency.
In scenario #2, you’d make $220,000 with much worse consistency.
Which would you rather have? I know I like #2 better.
The lesson: your total accumulation of money is far more important than how smoothly the money comes in.
Of course, you have to avoid major drawdowns, because it’s so hard to dig yourself out. If you have $100,000 and you lose 50%, you’re down to $50,000. So you have to gain 100% to get back to even.
But if you lose just 15%, you have $85,000 and you can get back to even with an 18% gain. Big difference right?
Shooting for perfect consistency in returns is a sucker’s game. Because your goals will be too pessimistic during the good times, and too optimistic when things go wrong. Instead, focus on becoming consistent in your behavior.
"Shooting for perfect consistency in returns is a sucker’s game. Because your goals will be too pessimistic during the good times, and too optimistic when things go wrong. Focus consistent BEHAVIOR." #tradingpsychology
Action Item: Try to Predict How Much Money You Will Make for the Next 8 Weeks
Lay out how much money you think you can earn next week. Then when the market closes on Friday, see how you actually did. Repeat this exercise every week for the next 8 weeks. Then compare your actual results to your predictions.
Preface: Intro to the Book
Chapter 1: How to Get the Most Out of This Book
Chapter 2: 13 Reasons Why Traders Fail
Chapter 3: Why Rational Traders Don't ExistChapter 4: The Myth of the Consistent Trader
Chapter 5: Trading Ain't Easy
Chapter 7: Get Obsessed With Price Action
Chapter 8: Why You Need Loss Limits
Chapter 9: Why You Need a Daily Routine You Love