So successful traders are those that can align their behavior with their belief system. And so the belief system then becomes of paramount importance. It’s like maximize profits, minimize losses, but also minimize potential lost opportunities. Right? Because you have to look at the opportunity cost of not taking the right action. You know, it kind of taken on from yesterday and the irrational fear of not keeping winning trades overnight or over the weekend. So all that adds up now, maybe you’re going to make 20% a year, but what would happen if you looked at carrying trades home overnight or over the weekend and you could turn that into 25, 30% per year, maybe for one year, it doesn’t matter. Maybe you don’t care about increasing your annual return by 50% mind you, you also don’t want to annualize returns because that’s a boogeyman.
It doesn’t typically work out on average. All you can do is count on what you have in hand. Anyway, I think when I look at the traders who I’ve either worked with or in the trader that I became myself, I really wanted to challenge my belief system to know what was real. The feelings feel certainly very, very real when you’re going through ’em. But again, I come from the ethos that sometimes good financial decisions don’t feel good. And therein is the lesson for the day. And for the last couple of days is what are you doing to yourself? Because you’re avoiding certain feelings. That’s actually not working out in your favor. Say it another way. Suppose you’re making, I don’t know, 15, 20, 20 5%. You could increase that too, I don’t know. Let’s look at the math. If you took it and did like 36% a year up from say 25, you could increase your returns by 50%.
Now you’re doubling your money every two years as opposed to three years. So compound that out over 10, 15, 20 years and see what that does on a pretax basis to your overall net worth, because although it might not mean something for you any particular week or month or maybe even for a year because you look, if you made 25%, you made 25%. But if you could increase that by approximately 50% and get to 36% Rule of 72: 36 goes into 72 twice. Now you’re doubling your money every two years as opposed to three. So look at that and see how much it’s costing you because that’s real money. You see. And I think when you look at the data and you start looking at, you know, your performance, right, you can really see how much it adds up and then you can compound it accordingly. If you compounded that money over 10, 20 years or so, however long you can estimate that you’re going to trade.
It becomes super, he helpful to at least look at your habits. And some of those things that you’ve kind of taken on that don’t really have any basis in reality, but certainly feel good, right? Because there’s a in trading, you have ritual and you have routine. The ritual is the stuff that feels good, but doesn’t really do anything for your P & L. The routine is your rules, your system, this and that. So make sure when you’re looking at these things, you’re aware of your rituals… You wake up, you shower, shit, shave, make the coffee, put the TV on boot up your monitors. It’s all feel good stuff. None of it helps you make money. You could actually trade and not have caffeine and still do well. So the routine part is what’s compelling and that has to be measured in study all the time and should be reviewed.
I think mostly that’s what we suggest people do is look at their behavior and keep a journal of their daily activities. Not necessarily their trades, because oftentimes that’s useless, but look at your behavior because your behavior predicts where you end up anyway. Any thoughts on these things? Of course I’m open to emails and healthy debate. I look forward to getting them. I appreciate everyone who subscribes and sends in emails about the show – constructive criticism is good. Helps me get better as I’m doing this for free. And I wish you all a really great weekend and I’ll see you early next week.
Click here to get your free copy of The Inner Voice of Trading audiobook.