For both individual trades, and trading in general, there is a strong inclination to over-estimate our own ability to make huge returns, as well as the market’s ability to produce those returns. New day traders especially like to wait for what looks like an ideal opportunity, and then expect big things from that trade. But big sharp moves that give you a big profit in a short amount of time are very rare, and also very hard to catch in real-time. New traders often try to make a lot of money, before being able to make a little money. Experienced traders control their expectations based on market conditions, and therefore make a little money when the market only offers a little money, and make more when conditions allow.
Expectations within Trades
It is important to temper expectations once a trade is placed. A lot of novice traders are looking for a homerun trade, but if you look at your charts carefully you will see that most of the time the market moves in rather consistent movements. When you consider the hundreds of thousands of transactions that occur each day, very few of those (relatively speaking) are part of a massive move.
In hindsight it is easy to spot a big move and say “I could make 100 pips there!” or if trading futures “I could have made 15 points on that trade!” The fact is, if you want to be a consistent trader you are far better off taking consistent gains which the market provides, instead of just hoping for big gain trades.
Each day is also slightly different. Some days it may be easy to make several trades for 20 pips in the forex market, while on other low volatility days it may be hard to catch a 10 pip run before the price starts to pullback.
Consider the chart below. If you trade on a 1 minute chart, price runs on this particular day ranged between 6 and 13 pips in the EURUSD during the London session. Therefore, unless you are willing to hold through several pullbacks, it is unreasonable to expect that you will make 20 pips on a trade just because you think it is a good trade.
Figure 1. EURUSD 1 Minute Chart
My preference is to trade what the market gives me. Therefore, if I am in a trade on this day and showing a 7 pip profit or so, I am looking for an exit. It is unlikely I got in at the very start of a move, or that I will get out at the very end of it. Therefore, I capture a chunk of a move, get out and look for other opportunities. On another more volatile day the runs may be 10 to 20 pips, in which case I will look to extract 12 pips or so.
This trading approach of keeping the average movement in mind is applicable to any time frame. Trade the averages, and don’t hope they will change until they do. Most traders like the idea of a big gain, yet don’t like holding through pullbacks or can’t tell when a pullback is actually a reversal (see: Should I Hold Through a Pullback, or Get Out?“). Therefore, I find it better to take consistent smaller gains based on what the market provides than always trying for big gain trades which have a very high failure rate.
Each trade is simply a small snapshot of our overall trading mentality. While it is nice to make a ton of money every day and every month, it simply will not happen. There are very volatile conditions, sedate conditions and conditions in which your strategies work very or very poorly.
Just like you need to look at how the market is acting in real-time and adjust your trade expectations accordingly, you need to adjust your expectations for your overall performance based on market conditions.
If you expect too much of yourself and really push hard during a market that is just not suitable for extracting a lot of profit you are likely to lose a substantial amount of money.
Pardon the clichés, but you need to walk before you run, and you need make small consistent profits before you can expect to make the big bucks. Once you are very consistent, as your account grows you can simply make more money by trading a larger volume. This way you don’t have change anything to increase your income. Risk only 1% of your capital on each trade, and as your account grows your position sizes will organically increase. Get consistency first and then make money through volume. Don’t try to make more on a trade than the market can provide–this is a sure way to fail over the long run.