If you have any questions pertaining to risk management, trading psychology, analysis & strategy, and other topics relevant to the trading process, come check out future Becoming a Better Trader webinars held every Thursday. Generally, a lesson and Q&A session are rotated every other week.
Whether you are a new trader building a foundation or an experienced trader struggling (happens to the best), here are 4 ideas to help you Build Confidence in Trading
Question #1 – Risk management
Q: How do I account for correlation when I have on multiple positions?
A: Correlations can be tricky due to their tendency to change without notice. With that said, however; it’s a good idea to take the safest route, which is to assume that two correlated positions could become losing trades. Split up the risk accordingly, i.e. if you normally risk 1% on an idea, then cut the position risk in half (0.5% each) so your account is still only exposed to the max 1% for an idea.
If two trades are inversely correlated, you can be more liberal in risk per trade as in theory they will have an offsetting effect on one another, but, again, remember that correlations can change without notice and what was inversely correlated can suddenly become correlated. A the very least don’t think you can put on abnormally larger size without additional risk, as this may quickly change on you.
Question #2 – Trading psychology
Q: I’ve suffered significant losses recently and want to know the best approach for making it back?
A: First thing is first. Put down the shovel and stop digging a bigger hole. If you are suffering a damaging drawdown you want to cut positions and get out of the fire. This will bring immediate psychological relief and allow you to objectively look at what got you into the predicament in the first place.
Once you’ve identified the issue(s) [hint: often-times it’s too much risk] come back trading very small. The idea here isn’t to make back the losses but to build your confidence back up in your ability to make good trading decisions. It’s only after you have re-established yourself that you can begin thinking about trading with normal size and recouping losses.
The Becoming a Better Trader series in one location, check it out.
Question #3 – Strategy
Q: How do you enter into a pullback trade?
A: This is a specialty of mine as I look for good pullback set-ups in trending markets. To help define when the correction I use support (for longs) and resistance (for shorts) along with candlestick analysis. For example, if EURUSD is trending lower and it rallies into resistance and then posts a reversal candlestick, I will be inclined to take a short as it is both respecting resistance and showing a turn in momentum in the intended direction of the trade. The other bonus here is that with the turn, you can use the high to assess where to place a logical stop-loss. Vice versa for longs…
To listen to all the questions & answers, please see the video above…
---Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX