I’ve picked up Dr. Brett’s book again, Enhancing Trading Performance (the one with a picture of him on the cover) and ran across this nugget in a section called “The Best Piece of Advice You’ll Ever Get From Dr. Brett” on page 221.
If you are developing your trading expertise, do it in a steady, progressive manner that creates neither excessive emotional highs nor extreme emotional lows. Do not traumatize yourself: The best treatment of all is prevention.
The best way to incorporate psychology into your trading plans is to ensure, through risk management, that you never expose yourself to outsized market outcomes.
It never really occurred to me that one should try to avoid outsized market outcomes that are actually too profitable, but this makes perfect sense. It might be nice to have a few extremely profitable outcomes, but when you do always keep in mind the risk that you take on to get them. As Van Tharp always says, there’s no mistake worse than one where you make money doing it.
This reminds me of some excerpts from the Market Wizards book series where some traders would actually revisit their trading plan if they ended up making more money that their backtesting had reasonably predicted because it often meant that there was probably more risk in their system than they realized.
These concepts are front and center in my mind as I try to find more opportunities to trade. There will (should!) be more profitable days, but this necessarily means that there will be larger down days as well.