Process Is the Only Refuge
A good decision can lose. The challenge is knowing what to learn from it.
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Next: Episode 9, You Are What the System Is Filtering
I take a trade that meets my rules. The position is sized correctly, the order goes through as intended, and I follow the exit. The trade loses money.
Later, I enter another market before my signal appears. The chart looks too promising to wait. This time, I make a profit.
Which decision should I repeat?
Judged by profit alone, the second decision looks better. But if I let that profit teach me to ignore my rules, I may have learned an expensive lesson from a lucky result.
The loss raises a different temptation. I look back at the first trade and think I should have stayed out. Now that I know what happened, avoiding it seems obvious.
Both reactions are familiar. Neither tells me how to make the next decision, when the outcome is still unknown.
What one trade can tell me
A trading rule needs evidence behind it. I need a reason to believe it has been useful across enough markets and conditions, after costs. I also need exposure that my capital can support.
Even then, a valid trade can lose.
My entry is one action among thousands of others. Some participants are buying, some are selling, and others are being forced to close positions. Their decisions affect the price I face. A news announcement or a sudden withdrawal of buyers can change what happens next.
That is the practical consequence of trading inside a complex adaptive system. I can choose my order. I cannot choose everyone else’s response.
Of course a sound trade can lose. Taking it never meant I controlled what followed.
Psychologists Jonathan Baron and John Hershey studied how knowing an outcome changes people’s judgments of an earlier decision. [1] In trading, the effect is easy to recognise. The losing entry starts to look foolish. The profitable departure from the rules starts to look inspired.
To judge either decision fairly, I have to return to what was known before the result.
Did the signal meet the rules? Was the size appropriate? Was the order carried out correctly? Was there credible evidence for using the method in the first place?
Those questions give me more to work with than whether this particular trade made money.
Then the next signal arrives
The distinction is easy to accept after one loss. It becomes harder after several.
Imagine a run of breakouts that keep reversing. Each trade meets the rules. Each loss is small enough to carry. Together, however, they begin to wear me down.
Then another signal appears.
I want to wait. Perhaps I should see whether this one gets further before entering. Perhaps I should take a smaller position. If it makes a modest profit, perhaps I should bank it quickly.
Each adjustment offers immediate relief. Yet each also changes the method.
If my research assumed that I took every eligible signal, skipping the next one means I am trading something different. If the method relies on occasional large winners, taking profits early may remove the trades that previously paid for the failed attempts.
An alternative rule might improve the strategy. I have to examine that possibility across all the trades it would affect, including the winners it would miss. The discomfort of the latest loss cannot do that work for me.
This is where a defined process earns its place. It gives me a decision to make before I know whether this signal will be another disappointment or the beginning of a long move.
What I can decide in advance
Before entering, I can specify the signal I require, how much initial exposure to take and what will cause me to leave.
In my own trading, I begin with small, comparable amounts of initial risk across markets. I use average true range, or ATR, to scale positions to recent price movement. I use trailing exits and no profit targets, leaving room for a sustained move to grow. My predefined Cut-Back Rule adjusts exposure when its closed-equity conditions are met.
These choices have limits. ATR does not measure every danger. A market can gap beyond an exit. Several positions can lose together. Reducing exposure during a drawdown can preserve capital while also leaving the account smaller when a recovery begins.
Writing down the rules does not remove those trade-offs. It makes them available for examination.
I can then compare what I intended with what I actually did. A profitable trade taken at twice the intended size cannot quietly become evidence that my stated sizing rule worked. A missed exit has to appear as a missed exit.
The record keeps the strategy I researched connected to the strategy I traded.
When losses demand a review
Following the rules is only part of the responsibility. The rules themselves must remain open to challenge.
Suppose losses continue. I begin by checking the trading.
Was the data correct? Did I use the intended contracts? Were positions sized properly? Did orders and exits execute as expected?
One trade can reveal an error immediately. I do not need a year of results to correct a position entered at twice its intended size.
If implementation was sound, I widen the review. Are costs higher than the research allowed? Are losses clustering across markets that share an exposure? Have the large winners become unusually scarce? Did the original results depend heavily on one market or one historical episode?
The answers may remain uncertain. A difficult period can occur within a useful strategy. Conditions can also change enough to weaken the reason for trading it. No single drawdown number settles the difference.
That is why I need review criteria and a review schedule before losses make the questions urgent. A serious operational problem still needs attention as soon as it appears. Broader changes to the strategy deserve a deliberate investigation.
If current costs have consumed the apparent advantage, faithful execution will not restore it. If the evidence remains credible but the exposure has become too much for my capital or obligations, I need to address that too.
Process must allow me to reach a conclusion I dislike, including the decision to stop.
A winning period needs questions too
Success can make this work feel unnecessary.
An exceptional winner arrives. The account recovers. I feel reassured that the method works.
The gain is real, but I still need to understand it. Did the rules capture the move as designed? Was the position a size I could reasonably carry? Did I follow the same method through the losses that came before it?
A profitable period can conceal mistakes just as a losing period can expose them.
I therefore keep two judgments distinct. I judge a decision using the information and choices available when I made it. I judge the strategy using its accumulated evidence, its implementation and the conditions in which I expect to keep trading it.
The first prevents one loss from rewriting the past. The second prevents discipline from becoming an excuse to ignore the present.
Somewhere to stand
The worker in the photograph is fitting a stone into a wall. Its shape, weight and fit deserve care. So does the foundation beneath it. If the wall begins to lean, the builder must investigate.
Trading asks for both kinds of attention. I need to make the next decision carefully, and I need to examine what the growing record says about the method.
That is what I mean by refuge.
After a loss, process gives me a reasoned basis for the next action. After a gain, it helps me resist the belief that success has made further questioning unnecessary. It includes preparation, execution, records and review.
I do not have to become indifferent to money lost. Losses matter. They reduce capital, affect other people’s plans and can reveal something I need to change. But caring about the result does not require me to let the latest trade decide everything.
Process gives me something to follow before the outcome, and something to question after it.
The worker reaches for another stone. Episode 9 turns to the person who must remain able to do the work through a long season of disappointing results.
Previous: Episode 7, What the Quant Approach Cannot See
Next: Episode 9, You Are What the System Is Filtering
Sources and notes
[1] Jonathan Baron and John C. Hershey, Outcome Bias in Decision Evaluation, Journal of Personality and Social Psychology 54, no. 4 (1988): 569–579. Their experiments examine how knowledge of an outcome affects the evaluation of an earlier decision.
Richard Brennan writes on systematic trading, complex adaptive markets, and the philosophical foundations of trend following at atstradingsolutions.com. His published books include The Fractals of Finance, Complex Adaptive Markets, Carved by Impossibility, and The Aussie Turtles Trend Following Guide, co-authored with Adam Havryliv. His forthcoming book, The Trend Following Manifesto, co-authored with Niels Kaastrup-Larsen, is coming soon.
You do not need to predict the future. You need a process that keeps you present for the rare moves that matter.
The Trend Following Manifesto: Building Robust Portfolios for an Uncertain World
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Want to explore why structure exists at all?
Carved by Impossibility: What Remains When Everything Else Is Eliminated
The book explores the architecture of constraint, emergence, and reality itself, and what it means for how we understand markets, life, and the universe.
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Want the theoretical foundation for why trend following works?
The Fractals of Finance: Determinism, Adaptation and the Geometry of Markets
The book explores the full architecture of feedback, fat tails, and fractal structure in financial markets, and what it means for how we trade, invest, and understand risk.
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Want a practical field manual for trading trends and capturing outliers?
The Aussie Turtles Trend Following Guide: A Field Manual for Hunting Outliers adapts the timeless principles of the original Turtle traders into a systematic, rules-based approach for modern markets. Co-authored with Adam Havryliv.
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