“Trading is a mind game”
Do you agree with the statement above?
It’s not about the methodology you use, it’s not about the way you analyze the market, it’s not about the indicators you use, not about Fibonacci or Elliot waves, not about fundamentals. Nope.
It’s all about confidence.
This is the reason two traders, using the same system, same trading plan, same everything, will have different results most of the time.
Because traders have different levels of confidence on themselves and the system.
One trader will get out of the trade sooner, then he will not take another trade, the other will risk more in the same trade, etc. There are practically thousands of different scenarios. And each trader will act based on their level of confidence. More on this later.
For now, let me tell you something that has the potential to change the way you see and trade the market for good:
It’s always better to trade a system you developed (or someone helped you developed) than a system you found somewhere else.
It doesn’t matter how simple it is, what kind of indicators you use, anything. If you developed it you’ll have better results that with a borrowed system.
Let me prove it to you with these two different scenarios…
#1 Trader takes profits too soon
Our first trader gets a signal and opens his trade. It’s the most beautiful signal he’s ever seen.
The market starts to move on his favor, then the market takes a little rest, but then continues on his favor.
Now this trader is not thinking whether this was a good signal or not, but about whether it will reach the take profit level… Every time the market stops, and retraces back a little makes him feel unconfident, even though the market continues on his favor…
At one point the trader decides that it is too much and closed his trade.
Why did he close his trade?
Because he is not confident about his trade reaching the take profit level. He thinks the market will change direction and eat all his hard earned pips.
And there will always be a reason: I closed it because of an important announcement, because I saw another signal, because something wasn’t just right… You name it.
But he keeps taking profits earlier than he is supposed to hurting his overall performance. I mean, this has been happening over and over, if he had just waited a little longer, the market would had reached his TP level…
He is still not confident…
#2 Trader risks more capital than she is supposed to
There is a signal for our second trader.
She is really looking forward to this trade, its been a while since the last time she had an opportunity to trade.
She looks at the signal again, and yes, everything fits and decides to open her trade, only this time she risk three times what she normally risks.
The trade didn’t play out as she expected and gets stopped out.
Why did she risked more than she is supposed to?
Because she doesn’t trust her system. She thinks either, her system will never get enough money in her trading account or it will take for ever to get there.
Again, this is a result of not being confident.
This is how these two scenarios should play out
Now lets see how these two scenarios play out when you developed and have confidence in your system
#1 Taking profits sooner
As soon as you open your trade and the market moves on your favor…
You start thinking about closing your trade (oh no, the mental game again).
This time is different though, you developed the system. You know how it works inside out. So you know you can trust your system, you’ve seen the results, you tweaked it until you felt comfortable with it.
Ok, since you are confident about your system you don’t do anything to your trade, you keep it open (and it falls like a rock stopping you out… hehehe I’m kidding).
Seriously, since you know you’ll hurt your risk-reward ratio if you take profits earlier, you just let your trade run.
Sometimes the market will reverse (you cant win them all) but most of the time the market will hit your take profit order.
#2 Risking more than you are supposed to risk
You get a signal, you analyze it twice and everything looks perfect…
You start thinking about doubling your risk on this trade… it looks like the perfect setup, fundamentals in line, in direction of the trend of the market, etc.
But then you stop thinking about it. Because you know there are no infallible systems and it is just not worth it to risk more than you are supposed to, it could hurt your overall performance.
You’ve got enough confidence on your system, and you know that if you follow it to the rule, you’ll eventually get the result you are looking for.
At the end you decide to follow your risk management plan.
How to build confidence in your system
Here is what you need to do to get the confidence you need on your system.
1 – Stop trading the system you are using right now.
Did someone gave it to you? Did you develop your system?
If someone gave it to you or you found it over the internet, just make sure if fits your trading style, risk profile, time availability, etc. There is no way to trade confidently if you are not comfortable with the system you are trading.
If you developed the system, make sure everything is right and answer this question: would you change anything to your system so you are more comfortable?
These are a few of the things that you should evaluate:
- Risk per trade
- Entry signal
- Methodology to set SL and TP orders
- Tools used to filter out bad signals
- How to handle each trade
- Position size
Add more if they are relevant to your system.
2 – Adjust risk
In order to get the confidence on your system on the maximum level you need to trade. But you need to start slow.
So I’d suggest this:
First, paper trade your new rules for a at least 20 trades
Second, use a very limited amount of risk on a real account (micro lots)
Third, add up more risk (mini lots)
And fourth, and once you get the desired results (in pips), risk at your comfortable level.
3 – Confidence is built little by little
Every time you follow every rule of your system you add up to your confidence.
Likewise, every time you dont follow your system (or any rule) takes away part of your confidence.
And let me tell you something, I’ve never seen a successful trader who is not confident about his/her system.
So you want to be a successful trader? Well, first you got to be confident on your system.
What do you think of the article? You think confidence is an important aspect of your trading?
What other things have helped you get more confident?
Let me know in the comment section.