Mark Douglas lays out the 5 fundamental truths of trading which are critical to your success. These are truths that you need to accept if you are serious about becoming profitable, and if you don’t then you are going to struggle. No matter what system or method you choose to implement, at the end of the day if you don’t have the correct mindset you are going to fail. This is why traders can take the exact same strategy and have vastly different results.
Developing a trader’s mindset begins with an understanding that these fundamental truths are a huge part of the foundation of becoming a successful independent trader.
The 5 Fundamental Truths of Trading
The fundamental truths of trading are core principles of the market that are non-negotiable.
These are truths that you need to accept if you want to make money. A few of these points can at first seem a little hard for you to get your head around and accept, especially if you have a long history in the market with other losing systems before joining us here at Crush Pro Trading. Understanding the basic truths of trading will help lay the groundwork for you to begin trading with less stress and more profits.
1. “Anything Can (and often does) Happen”
This is something that is all too often forgotten and disregarded by traders. Whilst this may seem pretty obvious and all traders consciously understand this trading truth, many don’t trade like it. What many traders will do when they see a great trade is risk more than they normally would.
When traders see a trade that looks the same as a winning trade they have played and made a lot of money on in the past, this rule can be quickly forgotten as they load up and risk more money than they normally would.
When the trader loses five trades in a row, they load up on the next trade and risk even more because before this they have never lost five trades in a row and so they just have to win the next trade right? The truth is that anything can happen and more to the point, it does.
The reason we have money management and the reason we never bet the farm is for this very reason. It is at the times when the trader is at their weakest when their account will lose its most and this is when this rule must be remembered.
2. “You Don’t Need to Know What is Going to Happen Next to Make Money”
This goes hand in hand with the previous point. As traders we don’t need to know what’s going to happen to make money. It is not a traders job to guess what is going to happen in the market.
It is a trader’s job to have a profitable trading edge that ensures that over a large amount of trades they will come out profitable.
It is a trader’s job to know exactly what their edge looks like and every time they see their edge form in the market they pull the trigger without hesitation.
3. “There is a Random Distribution Between Wins and Losses for Any Given Set of Variables That Define an Edge”
If you have a profitable edge it means that over a set of trades you will come out profitable. It does not mean you will win every trade.
What is often misunderstood by traders is win rate. If a trader has a win rate of 60% this does not mean they will win the next six out of ten trades. The 60% win rate is built up over a large sample size.
If I am to flip a coin I could either get a result of heads or tails. The win rate of both the heads and tails is 50%. If I was to flip the coin ten times I could come up with ten heads in a row.
This does not mean that all of a sudden the win rate is no longer 50%, it’s just that we don’t know which flips will be heads and which will be tails. It is the same with a trading win rate.
Over time, the flipping of the coin would even out the distribution of heads and tails until eventually the 50% win rate would be restored.
This is how trading win rates work. If a trader has a win rate of 60% it means that over a large number of trades they average 60% wins and 40% losses.
Win Rate is one of many metrics to measure your trading performance. Alone, it means very little.
“95% of the trading errors you are likely to make will stem from your attitudes about being wrong, losing money, missing out and leaving money on the table. These are the 4 Trading Fears.”
– Mark Douglas
Money Management is Crucial
This is a very important point! There is a random distribution between wins and losses for any given set of variables that define an edge.
This is why we never bet the farm on any one trade and also why we never focus too much on any one trade.
You NEED Money Management in Your Trading That Works.
We have to focus on the trading edge and the overall plan because whilst the individual trade does matter, in the scheme of things it is one trade in the overall sample size of trades.
We can never know which individual trades will end up being the winners and which will end up being the losers. This is why it is so important to stick to the plan and the trading edge.
4. “An Edge is Nothing More Than an Indication of a Higher Probability of One Thing Happening Over Another”
Nothing in trading is 100%.
No matter how great a setup may look, it is still only high probability. Your price action trading edge is an indication that price has a higher probability of doing something over another. Whilst traders will lose individual trades, if they have a profitable trading edge, they will come out profitable in the end by being in enough high probability positions.
5. “Every Moment in The Market is Unique”
This can be easy to understand, but very hard to practice with trade setups.
As price action traders we are trading patterns that have been created from other trader’s behavior. The price action on our charts has been made directly from what other traders have traded.
For example; if other traders have sold, then price goes down and if they buy price goes up and this affects what price looks like on our charts.
The reason it can be hard for traders to implement this rule at first is because no matter how much the same two setups may look exactly the same, it does not guarantee that they will work.
Just because the previous setup may have worked as a great winner, does not make next trade that looks exactly the same any more chance to also be a winner.
Every moment in the market is unique.
Traders will often see a setup form in the market and it will look exactly like a setup that they have traded in the past, win or lose.
It will be on the same pair and on the same time frame and have all the same attributes such as a pin bar at a key level etc.
Because the trader cleaned up last time and made a lot of money and this pin bar looks exactly the same, they will load up and risk a lot more than they normally would.
However; the previous pin bar has zero bearing on how this new pin bar is going to work out.
Why is it Impossible for the Market to Move the Exact Same Way Twice?
For this new pin bar to move exactly the same as how the previous pin bar did, it would have to have exactly the same traders in the market with exactly the same size orders.
The same traders would have to be getting in and out with exactly the same size orders at precisely the same time, to the exact moment. They would have to be exchanging their orders to the exact same people on the exact same platforms to make this new pin bar move in the exact same way.
Obviously this is impossible!
This is why every moment in the market is unique and also why no matter how great a setup looks or how similar it may look to a previous setup that worked out, it can still fail!
The same goes for when you skip trades that look the same as a previous trade you have lost money on, even though they fit your rules and trading edge. The previous trades do not affect what will happen next.
Profit Gap
Most traders have a profit gap in their trading.
This profit gap is the amount of money that they could and should be making, but for a particular reason or reasons are not. The reasons more often are NOT system or method related, but how the trader looks and thinks about their trading. If a trader uses the same mindset and thinking patterns with every system, then every system will fail! That is why learning how to start thinking differently about the markets is crucial to your success.
You are already taking steps to close the gap by developing a trader’s mindset with us and Mark Douglas. The other thing you must do is keep a detailed journal!