What it means
Process thinking judges a trade by whether it followed the plan; outcome thinking judges it only by profit or loss. Because single results contain a lot of chance, a good decision can lose and a bad one can win.
Why traders use it
If you reward lucky rule-breaking, you reinforce the habit that eventually costs the most. Grading process keeps attention on what you control: setup, size, stop and execution.
Chart examples
Lucky start, bad finish
How to identify it objectively
- 1After each trade, mark: plan followed or not.
- 2Separate four groups: good process/win, good process/loss, bad process/win, bad process/loss.
- 3Review the "bad process/win" group carefully: those are dangerous lessons.
- 4Judge the method on a large sample, not on single trades.
Bullish use
- 1Count a planned loss as a correct trade.
Bearish use
- 1Count an unplanned win as an error to fix.
What confirms it
- Journal grades process separately from P/L.
What invalidates it
- Changing rules after one loss.
How a hypothetical setup is built
Entry
Plan entry, stop and target before each trade.
Stop
As planned.
Target
As planned; grade the trade afterwards on execution.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
- Risk Management & StatisticsExpectancy
- Trading PsychologyOverconfidence and Recency Bias
- Risk Management & StatisticsLook-Ahead Bias and Overfitting
Historical testing
The drawing uses two made-up lists of 12 trades. Rule-breaking trades are ahead after four trades (+6R versus +1R) and finish at −5R; rule-following trades finish at +5R.
Limitations: when it fails
- A plan with no edge stays without edge even if followed perfectly; process is necessary but not sufficient.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.