To my mind, the ‘mistake’ in this discussion isn’t in not executing the plan but instead in setting the parameters of the plan. It’s like choosing the level of heuristics test on your antivirus. Too sensitive and you get false positives (mistake in identification / taking bad trades), set it to not sensitive enough and you’ll miss out real viruses (mistake in non-identification / missing good trades). So the issue comes about before we even get to the plan execution, it is about which approach a trader is more comfortable with when designing his plan and what would yield better results in the long term. In that respect I think it’s up to the individual and the specific system they’re trading, how it backtests, forward-tests etc.

Interesting topic.

To extend your metaphor, a doctor also looks for patterns to make a diagnosis. The advantage is that he is attempting to figure out what is going on now, not really to figure out what is likely to happen next (though, that then becomes the carry-on), and he can keep testing and altering the diagnosis as new data becomes available. If he repeatedly kills his patients, though, because he mis-reads the charts and doesn’t know that the MRI means, the medical board will conclude he doesn’t know what he’s doing.

If, as you say, you are mis-applying the pattern recognition it implies you don’t really know what you’re doing. That’s a whole other issue all together.

I think the difficulty is in the practical integration of this into a plan in case of discretionary traders. It is close to impossible to completely lock down the trading rules and hence the plan. A certain level of ‘intuition’ or flexibility or ‘pattern recognition’ is in play which isn’t exact science. Otherwise everyone would just program their rules into some s/w and ‘go to the beach’. Hence the mistakes are in fact just mis-applying the pattern recognition.

Happy to hear your thoughts on this.

Note, when I say “system” I don’t necessarily mean some mechanical thing. I just mean whatever method the trader uses to identify and time the entry of positions.

I’ve given this some more thought and at first I was convinced that taking bad trades was worse. Having thought back on some of my worse days, I know that missing a good trade often leads to other mistakes including taking bad trades.

It’s no doubt a difficult balance – taking every good setup but not overtrading.

To John’s point – since every trade setup is different and discretionary traders are not computers there has to be some leeway for mistakes, however small.

John – let’s say you had two traders approach you. One realizes they have a problem skipping good trades and the other realizes they have a problem taking too many bad trades. All things being equal – which one has the more serious problem?