Winning the Mind Game in trading - Using Data to Trade with Certainty - #242
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Welcome back to the Trade Society Traders & Proof podcast and this episode has been brewing in the back of my mind for quite a while. And I think this has the potential to completely change the way you interact with your trading and it can provide a lot of aha moments hopefully. And the topic of this podcast episode is "Winning the mind game in trading: Using data to trade with certainty".

And I want to get right into the episode because there's lots to talk about. And I have come to the conclusions in this podcast

After the last two or three years where I've been working more closely with a lot of traders in our mentoring, but also in Edge1 because in Edge1 we really see how traders trade. We see the decisions they make, the mistakes that they make, the struggles that they have. And this helped me to have a lot of big realizations about trader development and trader improvement. And many traders find themselves often paralyzed or driven by

by fear because they don't know what to expect when they enter a trade or how they should optimally apply their trading rules. And this uncertainty leads to a lot of emotional responses and then to suboptimal trading decisions. So you might exit trades too early, jump in and out of trades impulsively without a plan, or hesitate to take valid setups. And the origin of those trading mistakes

are often very, very similar and the fix for all of those issues is also very similar. Which is why this is such an important topic because you don't need to do a lot and by just engaging in a few practices that we will cover in this podcast, you can potentially improve all of your weaknesses in your trading psychology. So first I want to talk about the psychology of confidence in trading.

An uncertainty is one of the biggest hurdles in trading. When you are unsure, your decision making suffers and you're making a lot of emotionally driven decisions. And emotional responses like fear, hesitation and impulsivity start to dominate your trading, often leading to a lot of trading mistakes. And this uncertainty affects your ability to apply your trading strategy rules consistently.

For example, a lot of traders ask themselves if they should trail their stop loss or leave it where it is. Or should they take partial profits and where should they take partial profits? Should they add to a trade? How should they add to a trade? And should they hold their trade through news or exit before a news release is scheduled?

And these doubts and questions plague every trader at some point. And I'm sure that you have also wondered about at least one of the things that I just mentioned. And the problem is if you have those questions in your mind and you don't have the answers to it, your trading decisions will often be very inconsistent. You are jumping around on one trade, you are trailing your stop loss. On the next one, you're not doing it.

or you're applying different rules for trailing stop loss, how you go about trailing it. And all of those inconsistencies add a lot of noise and they obviously don't help you answer the question because you're just always second guessing and you're probably making the decision of whether you should take a partial profit or whether you should add to a trade based on the most recent trade, but not on a good amount of data or sample size

where it actually would tell you what the right approach is. And finding the most profitable answers to these questions and building an optimal rule set for your trading is actually much simpler than you might think.

And the answer to all of this is confidence. And confidence is the key to maintaining discipline and the ability to stick to your trading plan, even when emotions threaten to take over, or maybe your most recent trading results are not that great. But then the question is, how do we build confidence? And this is also one of the main topics of this episode.

So when we talk about how we actually gain and build confidence in our trading and overcome uncertainty,

then gathering and analyzing data is a powerful and maybe the most powerful way to replace uncertainty and clarity. One of the best ways of how I have found how traders can build confidence is through backtesting and journaling and reviewing your trades. And those are really your primary tools for this knowledge base.

Backtesting and journaling with reviews lets you see how your strategy performs under different market conditions. And the data that you gather during your backtest and through your trading journal helps you understand your strategy's strengths and weaknesses, and it then helps you to reduce emotional decision-making in real time.

When we talk about building confidence, it's important to understand that in the beginning when you're just starting out or you're picking a new trading strategy, it's absolutely normal to not have confidence because you have no idea about the strategy, you did not have used it or tested it extensively. And then being uncertain is absolutely the right emotion and

to feel about this. But it doesn't have to stay that way. And when a new trader is coming into my mentoring program, for example, I always tell them, pick a trading strategy that I provide and then backtest it. And what this does is that

It first helps you understand the different rules and the parameters of the system. So what are the different tools, indicators, timeframes that you are using to find trades? It helps you to familiarize yourself with how the tools work. It helps you build your pattern recognition very, very quickly because in a backtest in an afternoon, you can maybe take 20, 30, 40 trades in a backtest and you will see a lot of different scenarios.

But another very important fact about backtesting is that you will get to know the parameters and how the system actually manifests in the markets. So for example, if you are backtesting one year of data on a given market set,

and you see that the trading strategy provides three to six trades a week on average, you know that you might not get a trade every day, but on average, you will get a good amount of trading opportunities. And a lot of traders have the problem that they are often uncertain about how long they should wait, if it's normal when there are no trading opportunities coming up,

And then this uncertainty leads to boredom or eagerness to trade. But once you really know what to expect and how many trades you can expect on average, and you've seen that there are maybe days or maybe there's even a week every now and then where you don't have a signal and it's totally normal, then you can deal with those situations very differently. Another benefit of backtesting is that you will see things such as holding time. How long should you actually hold?

hold a trade, how long is the average holding time that you need to stay in a trade. So when you then take a trade in your live trading and it doesn't work out right away, the market is just moving sideways a little bit and you're not sure what to do, then you can look back at your backtesting results and you see that this is actually quite normal, that the market doesn't just move into your target in one straight line, but it's quite normal to hold a trade through some ups and downs.

In a backtest, you can also very easily confirm whether you should trade your stop loss and what the trade management approach is. And this is really, really helpful in the beginning. Obviously, as you can now probably imagine that once you can confirm and can verify some of the base parameters of a trading system in maybe just a few afternoons in your backtest,

that then help you to move on to demo trading in a real-time moving market is just so valuable. And this is basically like a shortcut to build confidence. Obviously a backtest is still quite limited and that's then where trading in real markets comes in. You don't have to necessarily risk real money in the beginning.

But you want to move on to a market that is moving in real time, where then holding a trade actually over a few hours feels very different than holding a trade in a backtest where you just skip forward candle by candle, or where you actually have to wait for a trade for a few days in a live market instead of just skipping forward until the next signal comes. And practicing this in a live market is then really helpful, obviously, once you know what to expect from your backtest.

And then it comes to also the journaling part, obviously. And as you probably may know, we are super big on journaling because we have developed Edgewonk as we have seen the need for a good trading journal. And having a trading journal where you record your trades that you have taken or maybe even the trades that you have missed.

gives you a lot of other different important data points besides just trade frequency but also what is the most profitable day for you what is the most profitable hour what is the most profitable combination of indicators or signals that you're using a lot of traders when they build a trading strategy they don't know if they should add a specific criteria to their trading strategy

and then they maybe add a rule, then they take it off because they don't think it adds value. They add another one, maybe then they take back an old one that they've used in the past and they think it might still be valuable. But if you don't have a way to actually verify if it's working or not, or if it's adding to your

Trading strategy in a good way or not. It's again a lot of inconsistencies and uncertainty which we have to remove and through a trading journal like Edgewonk we have built specific tools that allow you to test different rules and parameters of your approach and to your setups and

And it is so, so valuable to actually really confirm and see, should you trail your stop loss? Should you manage the trade or just leave it alone and have your stop and your take profit in place and don't interfere with it anymore? Or what is the best timeframe combination? And all of those things you can actually confirm right away. And I've seen that once you do the work yourself, actually,

Instead of just picking up a system on the internet somewhere and then trying to make it work It's gonna help you so much more because you have done the work You have been in the trades you have collected the data You can trust the data because you have gathered it you have lived through the trades and the insights that you will get from those types of data points in your journal is going to be so valuable because you then build super confidence in

in all of those things and then you know exactly what you should be doing. You know exactly is trade management the right approach or is it good to do a passive approach? Should you exit before news or not? Your trading journal will show you the data 100% clearly.

And having those answers is invaluable. I cannot stress this enough and I cannot tell you really how important it is that you find the answers to those questions. And the more questions you can answer for yourself that you previously had doubts over and that caused you stress and uncertainty and maybe even frustration, the more your trading will flourish, the more answers you will find to all of those questions.

So I've already just mentioned a few important metrics that you can track in Edgewonk and in your backtest. But let me put a few more thoughts on this and help you get an idea of what you can track and what you should track and how it helps you. So one of the first things I think is really helpful is trade frequency. So how often will you find a valid setup?

And this will help you battle a lot with impatience and help you overcome impatience. If you see that you get a good setup maybe every two days, depending on which time frame you're trading and how many markets you are following. Also in that regard, I would always look at at which time do the setups occur. Do they occur in the morning, in the afternoon, during midday? That will help you as well to get a better idea of when you should

be ready to sit in front of your charts and look for trades. Trade duration, very very important. How long do trades typically last? And this can help you with anxiety being in a trade. Also when you look at trade duration, look at how the market is moving up and down. Is it normal to see fluctuations? Is it normal to see corrections?

how deep are those corrections going to be, that will help you get an idea of the natural price movement. A lot of traders expect that when they jump into a trade, that the market will move to your take profit right away, but this is not the reality of trading. So get an idea and a feel for the market move, the wave rhythm and all of those things. When we talk about performance metrics, win rate is obviously very, very important. And if you see, for example, in your back test that

the strategy you're having your trading and your testing has a 55 to 60 win rate a lot of traders in a real market environment wouldn't be able to handle that if they haven't done the work previously because if you take 10 trades and only maybe five or six of them work a lot of traders will start doubting their trading system but if you've seen in your back test that having your 55 60 win rate

and they take a look at or they shoot for a 2:1 or 3:1 reward to risk ratio and it typically works quite well and they end up making money over the long term, they will approach their trading very very differently than a trader who hasn't done the work. If you know and if you see that a 60% win rate with a 2:1 reward to risk ratio is actually going to give you a profitable edge over the long term,

That is going to be so valuable. Also, it will help you to get away from this short term mindset when you see in your back test or in your demo that you have maybe weeks or maybe occasionally a month where you are just having a break even result. Maybe there are months where you have a slight losing month, but over the long term, the good market opportunities will come back.

if you just stick around long enough and it's totally normal that those periods happen, then you will approach your trading very very differently. Average drawdown very helpful as well to track and look at how long do losing streaks last, what is the normal losing streak, is it normal to have 3, 4, 5 losses in a row. Most traders will see that this is absolutely the case in a backtest.

where you backtest maybe a year, maybe two years of market data and you have five losses in a row. But then the good trades will also come and then just two or three good trades with a 3:1 reward to risk ratio will put you back above break even and help you move back into profitability. So knowing the average drawdown, the losing streak size will help you prevent a lot of panic when it happens.

In Edgewonk, one of the most important things or helpful things to track is how much is the price moving into your favor. One of the big struggles that I keep seeing week after week in Edgewonk is that traders don't know how to let their winning trades run. And as soon as the market is moving a little bit into their favor, they will cut their profit too early and then they will see that the price is running towards their take profit but without them. This is super, super frustrating and if you keep cutting your winners short,

It will not work over the long term and this will destroy even the most profitable trading system.

But if you see week after week, trade after trade, that you should just listen and follow your trade plan based on the backtest that you have made, where you have backtested the 3 to 1 to raw to risk ratio. You have seen that it works over the long term. You can trust your trading plan and you don't have to interfere with your trade and not take profits early. This will give you so much confidence in holding your trades. And knowing this is, again, super valuable.

Another thing that I've seen quite often in EdgeWong, which is helpful, is seeing which days of the week perform best for you. I've seen a lot of traders underperform on Mondays and Fridays. And it's not really that the market is not that great on Monday and Friday, but Monday, often traders haven't done the homework on the weekend, so they're not ready for the new trading week. They haven't marked up their charts. They haven't done their trading plans yet.

And that is then often leading to an underperformance on Monday. On the other hand, if you see an underperformance on Friday, it could be that

You are just exhausted from the long week at work or the long week in the markets and that is then leading to an underperformance on a Friday. So having this data in your trading journal and seeing this and then after you see this really try to track it down, see why this is happening and Edtrunk will tell you that as well, then you can approach your trading very differently. And you can see hopefully that once you are able to answer all of those things, your trading will change completely.

This certainty that you get through answering all of those questions and having the real valid verified answer is going to transform your trading mindset and your trading psychology 180 degrees and help you trade like a professional where you're not doubting, second guessing and having all of those inconsistencies in your trading.

So I hope this podcast episode helped you and I gave you some things to think about and even more important, some things that you can implement in your trading. I would recommend to start small as always. Maybe start with a backtest. Backtest one strategy over the last three to six months and see how it goes later.

and gather some data points. Don't overload yourself with data points, but start with some core basic numbers in your backtest, such as

How many trades do you get? So record the date of the trades, record the hour of the trade, record the reward to risk ratio, the holding time, and those are already very good starting points. And then when you are in your live trading, be it demo or actually trading real money, you need to have a trading journal where you record all of your data points as well and to just start answering all of those questions.

Whenever you find yourself wondering and doubting and asking and questioning yourself, write the question down. Write it down what you're wondering about, what you are not sure about in your trading approach and your strategy. Write it down and then try to answer it with your data. Try to answer it over the next few weeks or a few days depending on how fast you can gather the data.

But try to eliminate more and more uncertainty from your trading and then over time you will see that you can overcome all of this fear and doubt and you will actually start transforming your trading mindset and your whole approach to trading.