Subjectivity Pollutes Your Trading Performance

Subjectivity.

It’s what pollutes your current and future trading performance. 

What does that mean?

If you ever hear statements such as:

• “I should have taken profits. I should have scaled out here”, or 
• “I should not have fought trend”, or
• “I should have cut losses here. I should have used a 40% stop instead of a 30% stop”, or
• “I should have added more here”

These are all statements that a lot of newer traders say. By new, we don’t mean traders who just started their trading journey. In fact, we hear this from traders who have been trading for 2, 3, 4, 5+ years. This type of thinking is what we call “1OT,” or 1st-Order Thinking. These types of conclusions that these traders come to, in hindsight, make sense. But in real time, they are highly subjective.

The problem is that no one knows when to take profits based on what the price is trading at. For example:

• You can take profits now, but what if the underlying moves even more in your favor?
• You can trade with the trend, but what if the underlying ends up reversing and moving against you?
• You can add more here, but what if the underlying moves against your newly added position?
• You can cut losses earlier next time, but what if the next time you do, the underlying simply moves back in your favor?
• You can stop averaging down, but what if that next time that you don’t, ends up being the time that you should have?

Hindsight calling out the things that you did that you shouldn’t have done, is NOT a strategically sound improvement and is hardly actionable in terms of trading improvement, because it is filled with subjectivity. Simply put, it is very 1OT.

Instead, achieve real, applicable solutions through objectivity by thinking outside of the box. Think about how you can really stop yourself from thinking and acting the way that you currently do, in order to avoid hand-wavy, vague, hindsight solutions. We call this “2OT,” or 2nd-Order Thinking. For example:

• Instead of “I should have taken profits earlier/later”...
  • Think “how can I structure the trade such that if price achieves Target 1, I will be ok with taking some off the table, and I will be ok if I miss the target by a hair and lose it all? And how can I adjust the trade to continue to maintain exposure while reducing risk?”
• Instead of “I should not have fought the trend”...
  • Think “how can I force myself to not execute the trade if it is against the trend? Do I need to automate this process?”
• Instead of  “I should have cut losses here, or I should have used a tighter stop”...
  • Think “how can I improve the trade or trade structure, via spreads, with potentially a looser stop, given that I simply cannot respect my stop? Or, how can I actually respect my predefined stop loss, again, do I need to automate this process so that I don’t hesitate to cut the position the moment my stop is touched”
• Instead of “I should have added more here” and then later regret that adding more turned a winner into a loser…
  • Think “how can I gain more exposure in the direction of my bias, such that I can achieve convexity while still limiting the downside”

In the markets, every single moment in time is absolutely different from any prior moment, which means that the right thing to do always varies from one moment to the next. You will never know what the right thing to do is, except in hindsight. So instead of beating yourself up about what you should’ve done, think creatively, outside of the box, and really think about actionable solutions, solutions you can implement, to avoid that type of mistake and hindsight feeling of regret - doing so will greatly improve your trading, your mentality, and put you in the 1% bucket of advanced traders that the average retail trader does not know about. 

At Options Brewers, these are concepts that we are all very familiar with already. Our trick to addressing all of the above problems, with outside of the box thinking, is simply using spreads. And we don’t just blindly trade any spread. It takes years of knowledge to know what we know - the right times to put on specific spreads, the right structure, the most optimal adjustments to make, etc. These are factors that our community of advanced, 2OT traders know about, that many others don’t, because they are stuck in a loop trying to find the silver bullet to trading. 

If you’d like to be part of our exclusive community, who think about trading in a completely different fashion than what many are used to or have been told, you know where to find us. We’ll see you on the other side.