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It goes without saying, but trust is essential to trading or anything we intend to do. There are specific ways to build trust, maintain trust, and make sure you stay on track.
Having a gameplan is paramount
Many traders enter the market without a clear game plan, ie. H. Not fully understanding their method of identifying trade setups and what strategy they intend to employ to leverage their analysis.
The roadmap itself can get you on your feet and inspire confidence before you get stuck. Here are the key factors you should know…
Recommended by Paul Robinson
Build trading confidence
There are countless ways to analyze the market, and there is no real right or wrong way. The key here is that you have a methodology, and a relatively simple one, because too much complexity can paralyze analysis, the obvious enemy of trust.
In addition to knowing your toolbox (whether technical, fundamental, or both), you should also outline specific trading setups that will give you an edge or a statistical advantage over time.
What time-frame are you most comfortable with?
You should have a target time frame. For example, the daily and 4-hour timeframes are excellent timeframes to focus on when trading forex. They provide ample information and opportunities while being slow enough that you are not forced to make decisions on the fly.
This is where day trading can become quite difficult, because the speed at which the market moves in such a short period of time can be taxing. This is also what makes day trading so attractive, but before you get started, you need to find out if it’s right for you.
You need to be aligned with your trading goals – don’t turn day trading into swing trading, turn swing trading into day trading, know your intentions ahead of time and stick to it. This will help avoid indecision, another obvious enemy of confidence.
Which markets will you focus on?
It is always a good idea to know the market you are trading and keep your universe small. Not all asset classes or even instruments within the same asset class move in the same way, they have their own personalities. Knowing the behavior of a small subset of symbols will give you more confidence.
Understand your tolerance for risk.
One of the big mistakes traders often make is that they tend to trade with too much risk. Not only will you suffer a disproportionate loss if you act beyond your capacity, your judgment will also be compromised. Once the fear starts, it’s easy to lose objectivity and make more mistakes. The accumulation of losses and mistakes naturally leads to a loss of trust.
What is the acceptable loss per trade, 0.5%, 1%, 2%, etc.? This varies from person to person, depending on the type of strategy and time horizon you focus on.
Breakout strategies tend to have lower odds but generally higher risk-reward ratios, while mean-reversion strategies generally have higher odds and lower risk-reward ratios.
Trading breakouts usually means more consecutive losses, so it’s best to trade smaller sizes, as a series of losers can add up quickly.
For the latter, you still have some losers to consider, just maybe not as many.
At this point, looking at your trading history can help determine how many consecutive losers you are likely to suffer (add some extra) and multiply that by the amount you risk per trade.
Can you handle this maximum amount? If not, please adjust your size. For example, if you find you have multiple losses on six or seven trades in a row, increase that to ten and multiply by your risk per trade. This gives you a number to help you understand how many drawdowns a series of losers might lead to.
Because risk is timeframe related – when you trade longer timeframes, you may be more risky per trade due to lower frequency and higher expected volatility.
In extreme cases, when intraday trading, you may see a large number of losers in a short period of time, resulting in a rapid accumulation of large losses.
Focus on the process, not the results.
Easier said than done, but the process of focusing on making good trades becomes much easier when you have a game plan and are comfortable with the risks you take.
Using a checklist, whether physical (beginner) or mental (intermediate), ensures that you tick the right boxes before entering a trade.
By being able to tick off trade setups, entry/exit, risk, etc., you can build confidence that you know you’re doing the right thing and plan for all situations.
It will also help you stay away from deals that you probably shouldn’t be involved in in the first place. These types of low-quality trades that end up being losers end up undermining your confidence in your ability to make the right decisions.
Confidence in maintaining self-efficacy.
How to maintain confidence
Review your trading journal and trading history regularly. This will help you correct your course before you go too far.
Journal and transaction reports are great to help you with this. You’ll find yourself doing some things well (doing more of the same) and badly doing some things (figuring out how to fix problems before they lead to costly mistakes).
How to repair damaged confidence
When you go through a big pullback, the first thing to do is stop the fire. Take a step back from trading and you’ll almost certainly find relief immediately. If you have time to recover, study your trading history and look for mistakes that led to pullbacks.
Once you’ve figured out what you’ve done wrong, start over and reduce the size of the deal. Make some good deals on the board before returning to normal deal size.
The point here is not to make a lot of money, but to restore confidence without causing further damage.
Overconfidence
You feel confident after winning, which is good, but not so when you get into the elation zone. Learning how to deal with success is just as important as learning how to deal with failure. If you don’t humble yourself, the market will do it for you.
Once you feel like you’ve figured it all out, or even feel a little out of control, it’s time to go the extra mile to make sure you’re following your trading plan and process.
Remember that winning trades can be bad and losing trades can be good. If you trade as planned and end up losing money, that’s only part of the trade, but it’s still a good trade. But if you trade outside of your game plan and make money from it, it’s a bad trade.
Why? Because in many transactions, this ends up doing more harm than good.
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