In this post

  • Trade: AUD/USD Short & GBP/CAD opportunities
  • Insight: How the wrong incentives ruin your trading decisions
  • Quote: Always question the accepted trading norms
  • Video: Why you fail trading based on fundamentals

Trade of the Week

In this week’s video we go through two trade opportunities that I had to rule out, and one trade that was taken by a member.

How the Wrong Incentives Ruin Your Trading Decisions

Most people know that trading is all about probabilities. But very few traders embrace this in all aspects of their trading. They think probabilistically when it suits them, like accepting that any single trade can lose. But ignore it in other areas, like when it comes to measuring their performance.

Take one week of trading. Statistically, that’s a tiny sample size. A few losses can make a great trader look bad, and a lucky streak can make a poor trader look like a genius. But countless traders, including many I know personally, treat their weekly P&L as a measure of success.

When I was living in Spain over 10 years ago, a trader I spent a lot of time with had a ritual… If he ended the week in profit, he’d reward himself. At first, it was relatively harmless, things like a kebab on a Friday night. But then it escalated. Soon it was new monitors, a coffee machine, a juicer, and eventually even a watch.

I’ve seen this same pattern play out many times over the years. Just last year, a friend of mine went on a massive Christmas shopping spree after just one profitable month.

The problem is that incentives shape behaviour. Psychologists call this operant conditioning. When a behaviour (like a profitable week) is followed by a reward, the brain wires itself to repeat the behaviour. That sounds fine in theory, but in trading it means your brain starts hyper-fixating on short-term outcomes, often at the expense of long-term positive expectancy.

When you turn your weekly or monthly P&L into your scoreboard, your behaviour changes toward protecting that number. You cut trades early to ‘lock in the week.’ You avoid valid opportunities because they might spoil the record. You change your risk and trade management decisions. Over time, you’re not trading logically, you’re just trading your scoreboard. And that’s a recipe for disaster.

If you truly think probabilistically, you have to embrace it fully. That means judging yourself on expectancy and decision quality across a large enough sample size, not on the randomness of a single week or month. Your incentive system should reward following your process, not short-term results.

And above all, don’t be like the traders who celebrate too early by spending profits before they’ve even withdrawn them… Only to watch those same profits vanish in the very next trades. (Unless, of course, you’re a fan of having bailiffs at your door.)

Always Question the Accepted Trading Norms

“If you will only ask yourself, ‘Is what I am being told really true?,’ it is amazing how much you can find is, or borders on, being false, even in a well-developed field!”

— Richard Hamming, The Art of Doing Science and Engineering

For a long time, I’ve been on a mission to change the way you think about trading. When you trace most trading problems back to their root cause, they often link to the perception you have of trading and how that leads you to focusing on the wrong actions.

This industry is full of illogical advice and statements that are repeated so often they’re just accepted as fact. If you take them at face value, you’ll constantly find yourself struggling to progress and searching in the wrong places for solutions.

Instead, never take what you learn at face value. Always ask why and figure out the logic before you accept it as true. No matter how many people insist it’s correct.

Why You Fail Trading Based on Fundamentals

We have new videos coming very soon. For now, I wanted to share a video from earlier this year that you may have missed. It’s particularly relevant after the week we just had with a lot of central bank activity.