Learning Trading Analogy: Much Worse Than The Hardest Jigsaw Puzzle Ever Faced

 

 

 

The struggle of learning to trade has been compared to puzzle solving, in this case a jigsaw puzzle.

While a puzzle analogy looks good, trading is no ordinary puzzle and provides no short cuts that your standard puzzle does.

Standard puzzles come with the following assists that can aid in solving them:

1. You know how many pieces are in the puzzle.
2. You can see the clear shape, color, and configuration of each piece, helping you to figure out which pieces go together. You can easily isolate the border pieces based on the piece shape.
3. You can usually see a picture of the completed puzzle, giving you help using color groupings to match associated puzzle pieces.

The “trading” puzzle has no such advantages:

1. You have no idea of how many pieces of the puzzle you need to create a working trading system. The market is a complex system of the resulting input of millions of traders/investors/computers. That creates an infinite number of solution paths along with their corresponding puzzle pieces that are waiting to be discovered.
2. You don’t have any kind of descriptor information on any piece. You have to work to find working pieces of the puzzle through pain staking observation. There are a myriad of potential behaviors/conditions to analyze to try to determine some type of connection/relationship for each “puzzle piece” to be discovered.
3. There is no advance “completed picture” to look at that will help you put the puzzle pieces together.

Faced with these additional hurdles, it’s clear the level of difficulty in solving the trading puzzle will be extremely high compared to even complex jigsaw puzzles.

While solving a hard jigsaw puzzle can take weeks or months, solving the puzzle of learning to trade can takes years or even decades, if ever.

 

 

How to Evaluate a Trade: Good or Bad?

 

 

 

When it comes to trading, the false belief many have is a profitable trade is a "good" trade while one that loses money is a "bad" one.

In reality, this isn't the case if ones goal is to develop good discipline in creating a trading plan that generates consistent profits.

Your developed trading plan MUST answer the following parameters:

1. Best entry value/range - this is your best predetermined entry area. This is critical as a good entry will have minimal whipsaw into loss area that can cause you to lose confidence in your trade.
2. Profit target - this is where you exit assuming the market moves according to your plans. You know the target in advance.
3. Stop Loss- If the market moves against your position, this is the value at which you have decided your trading plan isn't going to work out and you are exiting your trade to minimize loss.

It's important to note that the above 3 values are determined BEFORE you initiate your trade. In the age of super computers, thinking that you are going to have enough time to respond to market moves on the fly is a recipe for future disaster. Having your values set in advance puts your trade in cruise control. Either your trade moves to the profit target or it hits the stop loss.

Evaluating the Trade

Once the trade is completed you have two possible outcomes:

1. Winning Trade.
2. Losing Trade.

Executing the trade will also have two possibilities:

1. You followed the full trading plan.
2. You deviated from the trading plan.

This gives you four potential outcomes which will be the grade of your trade:

I. You followed the trading plan and had a winning trade

This is a clear good trade. You had a plan, properly executed it and the result was a winning trade.

II. You followed the trading plan and had a losing trade

This also falls under being a good trade. The trading rules were followed. Your next step here is to do some analysis to determine why the trade didn't work out- whether it falls within the expected win/loss ratio of your plan or if your plan needs adjusting.

III. You deviated from the trading plan and had a losing trade

This is a no brainer bad trade that can be expected from not following the trading plan.

IV. You deviated from the trading plan and had a winning trade

This is a bad trade and something many people get wrong by not realizing it. Not following the trading plan results in inconsistent actions and inconsistent results, and can reinforce bad habits. The trade being profitable in this case doesn't change the fact that the trading plan wasn't followed which is going to sabotage any hope of being consistent in generating profits.