Don’t’ trade your P&L (profit & loss) is a common phrase that gets thrown around a lot, but very few traders have a real understanding of why we trade our P&L in the first place, what causes this negative behavior and how to avoid it. The popular and trivial tip, “just don’t look at your P&L” just isn’t enough because it doesn’t tackle the underlying emotional problems as we will see. Trading your P&L goes deeper and there are a handful of things we can do as traders to overcome it.
What does ‘trading the P&L mean’? 4 common mistakes every trader makes
Before we get into the specifics, let’s take a brief look at what trading your P&L means. First, P&L stands for Profit and Loss and by that traders mean their account balance and/or the unrealized profits of their trades. Trading the P&L then means that traders make trading decisions, such as exiting trades, choosing position size and picking entries not necessarily based on the chart context and what price action shows, but what they believe about their account balance, recent wins or losses, and their current profits.
I just want to get out for break-even
A common example is when traders are in a losing position and then add to a loss or widen the stop loss order while repeating to themselves “I just want to get out for break even”. Been there, done that. But at this point a trader is completely detached from the chart and the price action and just focuses on the money he doesn’t want to lose. Big, big mistake as we all probably know.
I need to recover my last loss quickly
Another common pattern is when traders just had a series of losing trades and then try to push their next trade beyond what they can reasonably expect. Trying to make up for losses by gambling with your next trades and profits is another classic sign of trading the P&L.
I only need one more winner to reach my goal
This is something most traders get wrong and I am sure that many will disagree but stick with me. Having performance goals or analyzing your performance in pre-defined periods has to be avoided and it creates many problems. If, for example, you have a monthly return goal and you haven’t hit it yet, you might force a bad trade just because your P&L needs a little extra push. When such a trade then fails and you find yourself further away from your return goal, it can easily end in a disaster. Trading is a continuous activity and variance plays a big role; it’s a big mistake to set random goals for each week, month or year because you can’t control how many trades you will get or how those trades will play out.
Oh, I don’t want this retracement to eat up all my profits
And finally, when traders are in a trade, trading the P&L causes many trade management issues. For example, a trader who is in a profitable trade and is up $100 but then suddenly sees a retracement and his unrealized profits go down to $70 might fear that his whole trade is in danger whereas he might just be looking at a natural retracement. This is a common problem and micro-management and inconsistent profit taking is a big problem for many traders.
10 tips to stop trading your P&L and become an emotionally stable trader
- Separate charting from trading
This is my favorite tip and I have seen that it works wonders for many traders. I use tradingview.com for charting and my analysis and when I want to execute a trade, I open my broker platform and enter the trade there. Then I will close my broker platform again. This way, I avoid looking at my P&L but it also creates a hurdle for me and I cannot as easily mess around with my trades later on.
- Hide the P&L column
Many platforms allow you to hide the P&L column. This is not perfect but it’s a starting point. You should try to eliminate as much P&L information from your trading platform as possible.
- Have a clear plan before you enter
Before you enter a trade, know where your stop goes, where the take profit goes and what has to happen to trigger an early exit. Even better, write it down in your trading plan. It will reduce the likelihood of messing up when you are about to act emotionally.
The last moment of objectivity is the moment before you enter a trade.
- Reduce lot size
When you are constantly trading your P&L and focus too much on the money it usually means that your trade size is too big for you personally. If a regular loss on a trade seems very meaningful to you, reduce your lot size and go smaller. Anxiety is always a sign that something is wrong.
- Analyze your trade management
To fully understand if your trade management is costing you money and how much, you have to track those things. You can do that yourself or choose a professional solution like our Edgewonk trading journal which evaluates in-trade management decisions and the impact on your P&L.
You can only improve things if you track them.
- Don’t look at performance in terms of periods
I mentioned it before. Don’t separate your trading in random and arbitrary periods. There is no reason why you need a weekly and monthly goal. It only adds stress. The fact that funds and professional money managers have their performance linked to yearly benchmark goals does create a lot of pressure which smaller investors can avoid.
- Don’t set performance goals
You cannot control how much you can take out of the markets. You can only control the quality of the trades you take and your risk. Profits cannot be controlled, so setting goals where you have no control over whatsoever is not helping…
- Focus on the process
…instead, focus on the process. Try to become the best trader possible by implementing a solid trading routine, having rules for your trading and having the goal to make the best trades possible. The best trades, in this context, are defined by how well you follow your plan and your system.
There is a reason why our Tiltmeter challenge comes at the very beginning in our Edgewonk trader development program. A better process usually always leads to better results.
- Don’t trade on your phone
Traders who trade off their phone will eventually end up trading their P&L. You can’t really see charts and perform a decent price action analysis so the only thing you can do is look at the P&L. You need to have your plan ready before you enter the trade. Then, there is no need to babysit the trade on your phone.
- Build trust and confidence
A lack of confidence in one’s trading method creates doubts and then causes a variety of emotional problems (FOMO being one of them). Many traders change their trading method regularly and have no deep understanding of their system. This creates a lot of doubts and uncertainty and when a trader does not fully understand how to execute and manage his trades, he will revert to trading his P&L.
To overcome this, make a conscious decision to stick to one system only and learn all there is about it. No system will work right from the beginning but it’s a trader’s job to seek continuous improvement.
I hope this helps you understand what trading your P&L means, how to manifests in trading behavior and how to overcome it. If you have tips which you think are worth knowing about, please leave a comment below.