In this webinar, we discussed the importance of consistency in everything we do in trading, from the type of analysis and usage of tools to trade execution to risk management. It may seem entirely obvious that inconsistent results come through inconsistent actions, but it’s easy for inconsistencies to occur when dealing with an uncertain animal like financial markets. Today, we discuss ways to help avoid the pitfalls common in trading and stay on an even track.
We understand the difficulties of trading, which is why we’ve put together a variety of guides designed to help traders of all experience levels.
Are you consistently following the same process?
Consistency can’t be understated when it comes to the process of trading. You have to ask yourself; am I acting in a fashion which is consistent with my game-plan? If you don’t have a detailed course of action, then now is a pretty good time to develop a trading plan.
The areas in which you need to bring focus and consistent attention to are – analysis, trade execution, risk management, handling specific situations, and tracking and review. All that is involved with the process of trading.
Consistency in type and application of analysis
For simplicity purposes, it’s a good idea to stick to a few core methodologies/tools which work for you. Not everyone goes about analyzing the market the same way, which is fine, but the key is that your process is consistent and easy to follow.
You want to go through the same process for identifying trades each time. For example, when looking at multiple time-frames – it’s a good idea to start with the longest first, then drill down to the shortest time-frame you look at (typically the one you execute on as well.)
Creating a hierarchy of importance in your analysis is a good idea too. For example, maybe you identify support and resistance in multiple ways – price levels, trend-lines, Fibonacci retracements, etc. Know which takes precedence, it will help keep things in order when there is conflicting signaling. Order keeps consistency.
Whether you are a new trader building a foundation or an experienced trader struggling (happens to the best), here are some ideas for Building Confidence in Trading
Consistency when executing trades
There are various ways to execute upon identified opportunities; again, very important to do it the same way each time. For example, if you trade breakouts: Do you buy the first price above a certain level or wait for the candlestick to close first? Or, maybe a combination of the two? Any of the prior is fine, but the more important point is that there is consistency in your actions.
It could be reversal bars (i.e. ‘pin’ bars) that you are trading. Do you enter with full size upon the close of the bar, 50% on the close of the bar/50% on a pullback, or wait for a pullback before entering at all? It could be some other variation of the above, but, again, the point is that there is consistency in how you do it.
How do you exit a trade? On a loser, hopefully you are just eating the loss at a predetermined stop-loss, but a losing position could be scaled out just as traders scale exits on profitable trades. When taking profits, is it at a specific target, using trailing stops, a combination, etc.? Could be any of these, the point, again, is that it is done consistently.
Keeping risk management parameters in a tight range
First thing is first – Trading is about probabilities (Risk/Reward x Win/Loss %). For example, 1:2 R/R @ 50% W/L, 1:3 R/R @ 40% W/L, 1:5 R/R @ 30% W/L, and so on, all lead to a positive expectancy… But if you aren’t consistent in taking trades and doing so with consistent position sizing, you begin skewing your ratios and expectancy.
Improper and inconsistent trade size is one of the most popular mistake traders make. Big size on one trade, small on the next – uneven results are surely to follow.
Handling Drawdown and Run-ups
It is imperative to have a plan for handling drawdowns and run-ups as a part of your overall risk management plan. It’s always a good idea to reduce your size or take a break from trading if having a bad run – don’t try and trade through it one time and stop another.
If you are trading well and experiencing a run-up, what is your plan for increasing size? It’s a good idea to take advantage of a conducive trading environment with more aggressive positioning, but you can’t run out and start trading multiples of your normal size in an effort to ‘kill it’. Demonstrate temperance, have a sensible plan for scaling up. When things are going well, you also want to be extra careful to not let overconfidence result in careless mistakes, which then lead to inconsistency and drawdowns.
Journaling & Periodical Reviews
An excellent way to make sure you are staying consistent and on track is by keeping a journal, whether it be daily or weekly. Make sure to keep tabs on your activity and what is influencing your decision-making.
Review trades periodically by overlaying your trades with your game-plan to see if you are doing as you set out to do in the manner you set out to do them. This is an excellent way to identify inconsistencies (aka mistakes). Correcting course by identifying mistakes will be an ongoing process, forever…
For the full conversation, please see the video above…
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Past webinar 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
You can follow Paul on Twitter at@PaulRobinsonFX