In Trading, It’s Quality, Not Quantity

Today it seems like our lives are ruled by “quantity”. How much money we make, how many toys we own, how many 10-second texts we get/send, throw-away electronics and cheap processed food. Quantity has become very important, and quality has been left in the dust in many ways.  The ironic thing is that to get more “quantity” (or quality, hopefully) in our life, many of us turn to trading–a seemingly easy way to make more money. Unfortunately, trading doesn’t reward you for taking as many trades as you can; it rewards you for taking quality trades.

The Drive For Quantity

In trading I see two common themes (there are more, but these are the most common) which drive traders to trade too much, and thus dwindle away their trading capital on low quality trades:

  • The first is the idea is that “If I make $100 (or whatever your profit is on an average trade) on one trade, then I make $1000 if I take 10 trades.”
  • Humans like to find reasons for doing things–even if the reason is totally flawed and illogical. If your brain decides it wants to make a trade (maybe you are bored), your brain then starts giving you all sorts of information to confirm making a trade. In other words, when there is no reason to trade, your brain makes up reasons.

A Move Toward Quality

While the first bullet point is mathematically true, when day trading there are only so many good opportunities each day. The number of high quality opportunities you find will depend on your strategy, but you can’t force good opportunities to arise. Either they show up or they don’t, so you can only trade what is given to you.

Some days there will be no trades; other days there will be more. If you are patient and disciplined, only taking good opportunities as they are arise, you will likely be much better off than if you try to trade more. By trying to take more trades, you’ll typically end up with more losing trades and erase the profit from the good trades.

The second bullet point is harder to overcome. The first step is to ensure you have a detailed trading plan, telling you exactly when and why you will get into and out of trades. If your brain starts telling you to get into a trade, look at your plan. If what your brain is telling you to do isn’t part of the plan, don’t take the trade.

This is hard to do. But slowly the mind will stop sabotaging you. You must remain disciplined and stick to the plan, even when you brain is screaming something different.  If you struggle with not being able to stick to your plan, see The Problem of Trying to Outwit Your Trading Plan.

Bringing it Together

Great traders take trades when the price is near certain levels, or experiencing very specific conditions. When those price levels or conditions aren’t present, great traders look for reasons to avoid trades.

Poor traders try to find reasons to make trades at any level, regardless of whether it is an important level or specific conditions are present.

There is a big difference in market outlook between the great and the poor trader. The great trader is opportunity seeking at high probability times only, while the poor trader tries to create opportunity everywhere and ends ups dwindling away his capital.

In trading it is about quality. Focus on refining your strategy to produce a handful of high probability signals most days. Realize that some days there just aren’t many great opportunities, and be disciplined enough to hold onto your capital for days when there are.

Each dollar you waste on a random, undisciplined, low probability trade is money you can’t use when you see great opportunities.

The world is ruled by the quest for quantity. Don’t fall for it. Focus on quality, and your trading–and life–will improve.

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