5 of My Trades From the Past Month, How to Transition to Trading Real Money, and More

It’s been a while since I’ve sent my end of week Nicholas’ Notes email. There’s been a lot going on over the past few months, both in and out of the markets. But it’s good to be back!

As it’s my first one in a while, I’ve made this one a bumper edition. As always, I’d love to read your thoughts on the points being discussed, so feel free to send a reply.

Trade of the Week

Usually I choose one trade from the past week, but this time I want to walk you through several trades over the past month. This includes the one I showed in our recent YouTube video.

There were a few different strategies at play, and some good teaching points. So I’ve recorded a video to walk you through them in detail.

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Transitioning to Trading With Real Money

I often hear from traders who did well on demo accounts, but once they started trading real money (either their own capital or a prop account) everything fell apart.

That’s inevitable. Trading with real money introduces difficulties you don’t face in demo. Our brains process financial risk in the same way as physical danger. Fight-or-flight is great when you’re surviving a bear attack, but not when you need to manage a trade logically. That response quietens with experience, but there are steps you can take to make the transition smoother.

1. Have well-defined logic for entering and exiting trades

My trades are based on opportunities with positive expectancy above a margin of error. Exits usually happen when expectancy shifts negative, but there can be other practical reasons too (end of day, opportunity cost, etc.).

If your logic changes with every trade or doesn’t make sense, you’re handing yourself a blank page to justify bad decisions under pressure.

2. Build confidence from a large sample size of data

Losing trades, streaks, and drawdowns are inevitable. The problem is the anxiety and negative spiral caused by them when you don’t trust your approach. Confidence comes from evidence, but it has to be the right type.

A few profitable demo months won’t give you that trust. Deep down you’ll suspect it was luck or that conditions have changed. On the other hand, a large sample of forecasts showing your probability estimates are accurate will give you reliable proof of your edge. From that data, you can calculate the likelihood of drawdowns and know they’re part of the process. That belief allows you to keep doing the things that produced the data, even when short-term results test your emotions.

3. Drill your process until it’s automatic

Archilochus said, “We don’t rise to the level of our expectations, we fall to the level of our training.” Under pressure, your brain reverts to its defaults.

I learned this the hard way in boxing. You have to drill things again and again in training for them to become your default actions when you’re being punched in the face!

Trading is the same. If you spiral when money is on the line, it usually means you don’t have a process, or you haven’t drilled it enough for it to be second nature. Following a consistent process while collecting the data for point #2 will mean it’s well drilled. That way, when fight-or-flight kicks in, your default response will be the one that leads to good results.

4. Understand your expected P&L shape

Most trading approaches don’t produce a smooth upward P&L. Instead, they generate a series of small losses followed by a relatively larger profit. In other words, most traders can expect an intentionally lumpy P&L curve.

You need to understand the type of curve you can expect and embrace it. That way, when you experience drawdowns you can view them from the right perspective rather than spiralling and taking the wrong actions. Without that perspective, many traders switch their approach to take small profits. Their attempt to claw back the drawdown goes against their expected P&L curve and makes things worse.

5. Increase risk gradually

If our brains treat financial risk like physical danger, we need to build tolerance the same way we would to a physical threat.

I’ll use a boxing example again. When you first step into the ring, you flinch at every punch. You close your eyes and turn your head, so you can’t execute your plan. But with experience, you stop turning away. You learn to take the hits and still execute.

Trading works the same way, you need to build your tolerance. Start with a tiny risk that barely affects you. Increase it gradually. If you notice negative reactions, stay at that level until it becomes comfortable enough to not affect your thinking. Then increase it gradually again. That progressive exposure keeps you in control, rather than letting survival instincts take over.

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Accepting the Possibility of Failure

“The ‘self-belief’ model of motivation assumes that if you acknowledge the possibility of failure, then you’ll be too demoralized or afraid to take risks. In that model, people who believe that failure is unthinkable are the ones who try the hardest to succeed. Yet in practice, things often seem to work the other way around-accepting the possibility of failure in advance is liberating. It makes you bold, not timid. It’s what gives you the courage to take the risks required to achieve something big.”

— Julia Galef, The Scout Mindset: The Perils of Defensive Thinking and How to Be Right More Often

Here’s a common contradiction: people say they learn from failure, but spend their lives avoiding it. Avoiding failure leads to inaction, and the only lesson in that is, “I should have done more.”

You’ll never reach the standards you aspire to by playing it safe. You can’t see where you need to improve if you never give it everything. The only way to truly learn from failure is to embrace it fully, go all in, and allow yourself to fail big.

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Make All Aspects of Your Trades More Intentional

In case you missed it, last weekend I released a new video (for the first time in 6 months!). I explain a mental shift that will help you take better decisions and actions with your trades, and avoid unintended consequences.