There are times when focusing on profits and losses is beneficial. For instance, it’s important for Tesla’s investors to know how much profit the company is turning. Since the company’s last year of net losses ($862 million in 2019), it earned an impressive $40 billion. The fact that Amazon took 14 years to turn a profit was also an important consideration for investors at the time.
But there are times when the P&L ratio is just a distraction. Even more, it can derail your trading strategy and set you on a path of random decisions.
You don’t need to know the P&L on a day-to-day basis. Here’s how to unlearn the habit of constantly looking at it.
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Tip # 1: Hide P&L from your trade window
Almost all trading platforms have some level of terminal customization. Look through your program and hide the P&L column from the main window. If it’s not possible, keep the tab somewhere in the terminal that you don’t look at too often. In any case, keep the ratio away from your main workspace.
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Tip #2: Look at your P&L as needed
Set up a schedule for when you need to update your current P&L. For example, you can make a promise to yourself that you’ll only look at it at the end of the session and write it down in your trading journal. If you trade long-term strategies, you can spread it out even more. This will ensure that you maintain certain time intervals between looking at the infamous ratio.
Tip #3: Keep charting and trading tools separate
Once again, separation is the best starting point to avoid trading P&L. This tip focus on using your tools for specific reasons. Use a charting tool to analyze the asset price, apply your indicators, and plan your next move. Then, use a broker platform to place the trade.
Tip #4: Focus on trade size management
If you constantly trade the P&L, it means you’re too focused on the money. If that’s the case, it means you’re making trades that are too big for your capital. You should be okay with incurring losses from time to time. Consider reducing the trade size so that no loss seems too meaningful.
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Tip #5: Understand the win rate expectancy
Strategies usually have an inherent win rate expectancy that’s calculated based on historical prices or tested in real market settings. The figures are not exact. But knowing them will keep you from peeping into your returns and losses—you’ll already have an approximate idea.
Tip #6: Prepare for ups and downs
The inevitable ups and downs of financial markets will never be a good enough reason to watch your P&L like a hawk. All you need is to prepare for different outcomes. Even in the worst-case scenario—when the market goes down unexpectedly—you should have certain measures in place, including stop losses and price alerts.
Tip #7: Have faith in your strategy
Good trading strategies take into account market volatility and even help you go through unpredictable events (like price spikes and crashes). So, take your time researching strategies until you find the one that you can trade in full confidence. While strategies are not perfect, they will help you practice mental restraint.
The myth of profit/loss
The blanket advice of having a certain profit/loss ratio is overly simplistic. Whether you decide to keep it at 2:1, 3:1, or some other ratio, the approach is wrong by default—it doesn’t take into account the practical realities of financial markets.
Keeping your losses low and your profits high is a good practice. You just don’t need to tie it to a specific ratio. If you find yourself slipping and checking your P&L more than you need to, go through this list of recommendations and follow your strategy with confidence.
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