It goes without saying, but confidence is essential to trading or anything individuals set out to do. There are certain ways to approach building confidence, maintaining it, and making sure traders stay on track. Without confidence, traders can’t perform optimally. There are necessary steps to take to not only build confidence, but to maintain it as well. For traders to feel confident in forex trading, a suitable game plan is required.
Here are some pointers to help increase trading with confidence:
- Know your trading style
- Pin down a trading time-frame
- Focus on few currency pairs
- Calculate your risk tolerance
- Focus on process not outcomes
- When your trading confidence is hit, reflect and repair
- Avoid trading overconfidence
Know Your Trading Style
The first of several facets to trading with confidence is having an analytical methodology and strategies which fit the trader’s personality. Each trader has a different view on how things work and what resonates when it comes to analysis. Having a firm understanding of what works is extremely important as well as being consistent in application. Whichever type of analysis is selected, traders should not overcomplicate matters by adding components which could lead to confusion. Simple and consistent application of indicators – support and resistance, trend-lines, Elliot wave theory will lead to traders trading with confidence.
“Through consistency you build confidence” – Paul Robinson Currency Strategist
Pin Down A Trading Time-Frame
Time frame filters down from the trading style or strategy employed by the trader. Different trading styles generally relate to specific time horizons. For example, a position trader will target long-term time frames for each trade. Time-frames completely depend on the trader’s mentality and the amount of time they can dedicate per day. 4-hour time frames can be a good place to start off as it avoids market noise and does not require constant monitoring. This comes back to sticking to a trading style which will prevent traders from jumping around between time frames.
Focus on a few currency pairs
Know the markets or currency pairs which are being traded as per the strategy. Keeping the pool of instruments/markets small is always a good idea. Not all asset classes or even instruments within an asset class move the same, they have their own characteristics. Knowing the behavior of this small universe of symbols will give you more confidence when trading.
Calculate Your Risk Tolerance
Trading with confidence has strong links to risk management and understanding tolerance for risk. This is perhaps the most important facet, as it keeps traders steered towards taking the proper amount of risk per trade to prevent traders overriding analysis with emotion based on a lack of acceptance of the risk per trade. Risk management trumps analysis.
Focus on Process Not Outcomes
Focusing on the process, not the results will allow traders to gain greater confidence whilst trading. This requires patience to refrain from primarily focusing on the end goal. One way to do this is to keep a checklist, whether on paper or mentally. This will help steer traders towards the trades which suit the trading plan and prevent traders from entering harmful trades. It also helps deviate focus on the profit/loss (result) and maintain objectivity. In addition to the above, focusing on process-orientated goals will aid traders in remaining organized in relation to the trading goals.
When Your Trading Confidence is Hit, Reflect and Repair
Drawdowns can take a trader out of the proper mindset to trade with confidence. In Paul’s video above, it was discussed how to handle a drawdown, which is an inevitable occurrence from time to time. The first step noted was to ‘get out of the fire’, and effectively hit the reset button. Secondly, review trades that were unsuccessful – market not conducive to trading style etc. It is important to note that the market is always right. Choosing not to trade is essentially a trade in itself. Once issues are identified, returning to the market slowly is a prudent approach until confidence is restored.
Avoid Trading Overconfidence
Handling periods of success and identifying when those periods might be drawing towards a pause is also key to maintaining confidence. Constantly reminding yourself to stay humble during times of success is paramount, if not, the market will make sure to humble you. Handling winning periods properly can be just as important as handling losing periods.
Trading Confidence: A Summary
This article has outlined several pointers that assist traders in building trading confidence. Traders need to recognize these different aspects of the trading process and should not disregard their impact. Controlling every aspect of the trading process is unrealistic, however making a concerted effort to manage the aspects you can control can provide you with a psychological advantage in the market.
Further reading to understand the concept of trading with confidence in the forex market
- Check out Senior Analyst Tyler Yell’s dedicated podcast on the importance of a trading plan and how to put one together.
- Traders should implement a trading plan to establish a clear framework when navigating financial markets.
- Psychology is important in any discipline and trading is no different. Learn about the top ten trading psychology myths.
- Read our dedicated page on how to manage the emotions of trading.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.