A common factor in the decisions traders make is paying attention to the right decisions that maximize profitability.
Not only is it important to make the right decisions, but it’s important to make the right decisions about the right things. Because there is so much information coming from the markets, no single person can process it all. So, we focus on certain areas of interest.
We do the same when it comes to decisions. As a trader, you constantly have to be evaluating the market and making choices about your trades. The thing is, psychologically, we are predisposed to put more emphasis on certain decisions than others. Some are more important, obviously, but do we always focus on those?
Maximizing Profitability over Number of Trades
The human brain is not a machine. It has emotions. It has instincts. And the subconscious is always there.
One of the most common elements of humans is to be adverse to risk. It’s a well-known fact that markets don’t like risk. And that’s because they are composed of humans!
Therefore, we tend to focus on decisions that are perceived to involve risk – that is, when we open a trade – and discount decisions that are not so evidently associated with risk (such as setting stop losses). This leads us to care more about how many trades we have instead of looking at the market in terms of profitability.
Finding the Right Balance
When we care more about certain decisions, we will put more effort into them. The problem is this can come at the cost of ignoring other decisions that are just as important. But, because they are perceived to be the opposite of risk – for example, closing out a trade – we often don’t make as good a decision simply because we subconsciously don’t feel it’s as important.
Often this inadequate prioritization of our decisions is because of hidden risks. For example, deciding to jump on a trade without checking the economic calendar.
You see a good opportunity, so you focus on what’s happening in the market. Checking the news, or the economic calendar is not an important decision because you don’t make or lose money by doing it. However, you might make a great technical analysis decision on a particular trade, but it ends up going sideways because there was an event on the economic calendar that caused the market to react differently.
It’s Always Personal
Finding the best balance for which decisions are most important depends on your trading style. But, if you are aware of the fact that you need to prioritize your decisions in a way that isn’t necessarily common sense, you can optimize your decision process to suit your trading.
One of the ways to get a handle on this is to make a decision flow chart.
When you have a moment that you’re not focusing on the markets and trying to make a decision with all the information jumping at you, work out every decision you make in the process of deciding to trade.
This will help you visualize your ‘decision tree.’ You will see which are actually the most important, and which aspects of your trading you are not putting enough focus on.
Divide and Conquer
You’ll be surprised to learn how many decisions you make even before you start to trade, ones you aren’t even aware of.
If you weren’t paying enough attention to remember, how focused were you on that aspect of your trading? There might even be decisions you should be making, but you just aren’t. Maybe you aren’t objectively deciding where the best stop loss is, because you’re too eager to jump on the next trade.
Record each decision you make in a given trade, and then see how much attention you pay to each step, and compare it to how much each one impacts your profitability.
Are your trades getting stopped out a lot? That might not be a problem of entering the wrong trades, but of setting the wrong stop loss. Want to improve your profitability? How much thought are you giving your take profit levels?
Bottom line is to weigh each one of your trading decisions in accordance with how much they affect your profitability, as opposed to how hard they are.