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It goes without saying, but confidence is essential to trading or anything we set out to do, for that matter. There are certain ways to approach building confidence, maintaining it, and making sure you stay on track.

Check out this guide which goes hand-in-hand with this webinar “Traits of a Successful Trader”

Having a GAME-PLAN is paramount

A lot of traders approach the market without having a defined game-plan, that is, not having a full understanding of what their methodology is for identifying trade set-ups as well as what type of strategies they want to deploy to exploit their identified edge. Having a road-map in of itself will get you started off on the right foot and instill confidence before entering the ‘heat of battle’. The following are key factors to know…

Know your methodology/toolbox

There are countless ways to go about analyzing the market, with no truly right or wrong approach. The key point here is that you have a methodology, and a relatively simple one, as too much complexity causes paralysis by analysis, an enemy of confidence.

In addition to understanding your toolbox, whether it be technical, fundamental approaches, or a combination of the two, you should have specific trade set-ups outlined which you have found to give you an edge (statistical advantage over time).

What time-frame are you most comfortable with?

You should have a targeted time-frame. For example, the daily and 4-hr time-frame are excellent time-frames to concentrate on when trading FX. They provide ample information and opportunity, while slow enough that you aren’t forced to make decisions on the fly. This is where day-trading can become quite difficult, as it is mentally taxing due to the pace at which markets are fluctuating. Trading intra-day time-frames is certainly a viable approach, but make sure you understand what it entails. And be consistent, don't turn day-trades into swing-trades and swing-trades into day-trades, know your intentions ahead of time. This will help steer clear of indecision, another clear enemy to confidence.

Which markets will you focus on?

Know the markets or currency pairs which you are trading, keeping your universe small is always a good idea. Not all asset classes or even instruments within an asset class move the same, they have their own personalities. Knowing the behavior of a small universe of symbols will give you more confidence when your P&L starts moving around.

Understand your tolerance for risk

One of the big mistakes traders often times make, is they tend to trade with too much risk. When you trade beyond what you’re capable of handling it leads to outsized losses and fear. Once fear sets in, it’s easy to lose objectivity and make even more mistakes. The accumulation of losses and mistakes of course then leads to diminished confidence.

What is an acceptable loss-per-trade, 0.25%, 0.5%, 1%, etc.? This varies from person-to-person, and is dependent on strategy type and time-frame you're focused on. Breakout strategies have lower win percentages, but typically higher risk/reward ratios, while range-trading strategies on the other hand typically have higher win percentages with lower risk/reward ratios. The former type of strategy means more consecutive losses, thus a good idea to trade with smaller size as a string of losers can add up quickly. The latter, you still have to account for a string of losers, just perhaps not as many.

This is where looking at your trade history can help in determining how many losers in a row you could suffer (add a few extra in for good measure) and multiply that by the amount you risk per trade. Can you handle that max figure? If not, adjust your size down.

Regarding time-frame: If you are trading longer-term time-frames, then you can risk more per trade due to lower frequency and larger expected moves. On the extreme end of the spectrum, if you are day-trading you could experience a large number of losers in a short period of time leading to an outsized accumulation of losses.

Focus on the process not the results

This is easier said than done, but if you have a game-plan in place and can accept what you have at risk, focusing on the process of making good trades becomes significantly easier. Utilizing a check-list, whether it be physical (beginners) or mental (advanced), can ensure you are checking off the right boxes before entering into a trade.

By being able to check off the appropriate boxes for a trade set-up, entry/exit(s), risk, etc., you build confidence in knowing you are doing the ‘right’ thing, and have a plan in place for all scenarios. It will also help keep you out of trades which you probably shouldn’t be involved with in the first place. Those types of ‘bad’ trades which end up becoming losers ultimately undermine your confidence in your ability to make good decisions.

When confidence is down, repairing it

When you are experiencing a large drawdown, first thing is first – get out of the fire! Take a step back from trading, you are almost certain to find immediate relief. Once you’ve had time to recuperate, study over your trade history and look for the mistakes which led to the drawdown.

Once you’ve isolated what you’ve been doing wrong, start trading again with reduced trading size. Get a few good trades on the board before returning to a normal trading size. The focus here is not about making money, but rather restoring your confidence without causing further damage.

When you’ve ‘mastered the universe’ (over-confidence)

After a big profitable run, overconfidence tends to set in. It’s just as important to handle success as it is to handle failure, because these good periods can quickly turn into bad ones if one doesn’t make sure they are continuing to trade properly. If you don’t humble yourself, the market will do it for you.

As soon as you feel like you have it ‘all figured out’, it’s time to double-down on your efforts of making sure you are taking good trades. Remember: Winning trades can be bad, losing trades can be good. That is, if you took trades accordingly to plan and lost, that is just part of trading. But if you took trades which are outside of your game-plan but yet made money, you perhaps got lucky and over time the carelessness will catch up to you.

For the full conversation, please see the video above…

Past recordings you might be interested in:Creating a Trading Plan; Handling Drawdowns; Risk Management; Analysis, keeping it simple; 6 Mistakes Traders Make; Focusing on the Process; Building Consistency; Classic Chart Patterns, Part I;Classic Chart Patterns, Part II

---Written by Paul Robinson, Market Analyst

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