10 Things Traders Must Quantify


Subjective: Based on or influenced by personal feelings, tastes, or opinions. Proceeding from or taking place in a person’s mind rather than the external world.

Subjective traders are intertwined with their trades. They generally enter out of greed and exit based on fear. They believe in their opinions more than the actual price action. They base trades off how they feel about a particular market. A subjective trade idea comes out of the imagination of the trader, from their own beliefs, opinions, and what they think should happen. Many times, reality is not even cross-checked as a reference. It is the subjective traders who see what they want to see instead of what is really going on. Their compass is their emotions, and they often have conflicting goals.

Objective: (Of a person or their judgment) not influenced by personal feelings or opinions in considering and representing facts. Having actual existence or reality.

Objective traders have a quantified method, a system, rules, and principles they trade by. They know where they will get in a trade based on facts, and where they will get out based on price action. Objective traders have a written trading plan to guide them. The guides of the objective trader are historical price action, charts, probabilities, risk management, and their edge. They react to what is happening in quantifiable terms that can be measured. They go with the flow of price action, not the flow of internal emotions.

  1. What exactly is your entry signal going to be? What technical indicators will trigger you to enter a trade?
  2. What will the perceived edge for your entries be based on? Will you quantify your entries edge with back testing of through trading principles?
  3. Will you wait for an initial move in the direction of your trade entry or will you enter based on a technical indicator trigger?
  4. How will you trade in different market environments and trends? Will you have better odds of success buying dips in bull markets and shorting strength in down trends?
  5. What is the risk/reward ratio for the trade you want to take? How much are you willing to risk if the trade is a loser? How much could you make if you are right? Is it worth it?
  6. What are the probabilities that this entry will be a winning trade based on past historical price data and charts? With the winning percentage in mind how big do the winners have to be and how small do you have to keep the losers for the trading system to be profitable?
  7. Where should your stop loss be? At what price level will your entry be wrong and signal you to exit the trade with a loss?
  8. How big of a position size should you take based on your stop level and total capital you are willing to risk on this one trade?
  9. Is your position size small enough to enable you to hold the trade without emotions effecting your ability to follow your trading plan?
  10. When you open this trade in addition to your other positions, how much of your total trading capital is now exposed to loss if all trades went against you at the same time?

Don’t succumb to the emotions of a trade, and don’t attach your ego to it. Be the trader that witnesses the trade from an emotional distance with curiosity. If you can find that space between yourself and the trade, you will become more accurate and more profitable. When you can approach the results of your trades with equanimity, then you are at the next level.

“Don’t succumb to the emotions of a trade, and don’t attach your ego to it.”