Having coached many traders over the years, one of the recipes for success is to follow the “path of least regret.”
However, human nature struggles with that concept as we typically go for perfection, trying to overachieve to feel good about ourselves. This keeps the trader in a state of frustration, leading to FOMO (fear of missing out) and revenge trading.
To trade well, you want to follow and trade according to the path of least regret!
How is this done? Let’s take the example of Setting Trading R-Goals.
This can be approached in three different ways:
A) A Trader without a pre-determined goal
Most traders do not have any trading goal. This means that subconsciously the goal is to maximize the R-outcome (or profit) for the day, week or month. The problem here is that – looking from hindsight – you could have always gotten into the trade earlier, having set the stop tighter and could have exited the trade at the price high to get an even better R-result.
Even if you had a great week, you do not feel satisfied and you want to do even better in the week that follows. Actually, this is not very fair to you. But, we still tend to do it.
Not having any trading goal is a source of constant frustration and regret.
B) A Trader with a stretch goal
A stretch goal is a goal that is difficult to achieve regularly, e.g. 20R per week. It is great to have a goal to work toward, but the issue here is that it leads to overtrading and gambling should the trader understand that he might not achieve the goal for that week as time is running out. He then looks for shortcuts to still achieve that goal. This can then translate into jumping into the market by not following the rules. Or, the trader takes a trade, but the stop is very, very tight – actually too tight – so as to shoot for a big R-multiple outcome.
Having a stretch goal leads to gambling, frustration, and thus, a lot of regret.
C) A Trader with a minimum R-goal that can be achieved consistently
This is a great goal to work toward. It is not so much the goal that is difficult to achieve, but the consistency in achieving it week after week. Consistency is exactly what we need to trade well, to build confidence and then to increase the position size to meet our overall money goals.
Such a minimum weekly R-goal could be 2R per week, as an example, resulting in well above 100% per year.
Once achieved, you want to have a plan to go for the next R-goal levels while not risking what has already been achieved. Though it is not expressly stated in the goal, this is the path to maximize your R-result, to trade a big position sizes and to achieve your long-term money goals.
Achieving your minimum R-goal consistently provides a lot of peace of mind, leaving no regret behind.
These examples nicely show how a trader with a clear plan to reduce regret will trade well as he exerts inner control.
Trading is a counter-intuitive activity, which is why not everybody can do it well.
You might better understand now why good traders are happy people.
Why don’t you follow the path of least regret, too?
The post Follow the Path of Least Regret By, Gabriel Grammatidis appeared first on Van Tharp Institute.
