When you approach trading as a retail trader (which is the case for 99.9% of the people who manage their own money), you immediately hit a wall.
Rarely you will find a fully organized syllabus, covering everything that you should know, pardon that you MUST know.
Yes there are fantastic books on different subject but retail traders never seem to get the full picture from the first time. It is always a game of multiple tries, errors, frustration, money lost.
There are many cornerstone subjects in trading and many times they all look equally important, however a few really stand out from the crowd: Risk Management, Psychology & Education, Quality Education.
Take away any of these ingredients and you will fail.
We often hear that psychology and discipline are extremely important but rarely WHY are traders failing in these fields. And most important how to fix the issue which is clearly affecting most of us!
If we track back the problem we will see that it is not that hard to overcome it.
Ask yourself this: When do you let other people’s opinions affect your own?
For me the answer is quite simple and straightforward – when i’m not confident in my own knowledge and expertise for a given issue.
We can easily bridge to trading again, after this conclusion. If you are not confident in your trading method(s) you will fiddle with your positions, close them earlier than you should, extend stops or remove them completely. Overall you will be breaking every critical rule and aspect of trading that you mustn’t.
So there we have it. In my humble opinion this is the root of the problem. Now that we have something to work with let’s elaborate more on how to fix it.
One way to approach the situations is using brute force. Get a piece of paper and start writing this 100 times:
Are you done?
If you feel like this may not be enough and won’t do the job let’s move on to possible solution #2.
SOLUTION 2 – PRACTICE & BACK TEST
Usually when you get better at something, you start forming opinions about it, have more confidence in that opinion and in general you are now inside your comfort zone.
Think about your driving skills. The moment you got your driving license, you probably had a very timid approach to the whole process. Both hands on the wheel – 2 and 9 right?
Few years down the road and things start to look a bit different. It is all about the practice, ain’t it? Some say 10000 hours some say a different number.
PRACTICE AND BACKTEST
At that point we have established that the solution is super simple – PRACTICE. If you have a mechanical system, chances are, it is codable. This is probably your best, most accurate and fastest approach.
Code it, back-test it, check out the stats and the results. Now you have an idea what to expect when you start trading live. What are the weaknesses, what are the strengths. Maximum drawdown? Highest losing streak?
If your method is not codable, you have to do it manually. This way is much slower and prone to errors but it is the only way for you go gain confidence in your trading method and also to prove that it actually works.
Before you start complaining about all the work you have do to, think about the pre-digitalization era and what traders had to do back then.
Truth be told, even though this is the harder way, you will learn your trading method inside out. You are also going to notice patterns that you would’ve missed otherwise. Think of it as catching fish and making your own dinner with it, rather than going to a restaurant. It just tastes different, better.
In case the method/pattern/strategy you are testing, will be coded but you still want at least some of the benefits of the manual back-test, you are in luck. Simply run the model in visual mode (most trading platforms have this option available) and then go over the entries.
PRO TIP – if possible, find a quiet, relaxed environment where you can do that for a few hour.
PSYCHOLOGY & DISCIPLINE
Some people are nervous fliers, period. Rational and statistics don’t matter. When you are 10km above the ground and you know there is no plan B, emotions surpass any logic. All the “what if” scenarios are playing in 4K in your head.
When trading we go through something similar. Every fiber in our body is telling us to:
The list goes on and on. Even though the last two may have some logic attached to them, if certain conditions are met, EMOTIONS and PSYCHOLOGY usually work against us in trading.
The best way to deal with them is to be prepared and to have quantifiable data next to your monitor.
Next time you hit a 5 trades losing streak but your backtest shows that it can actually go to 7, why worry? Have you followed the rules? Have you done anything outside the scope of back-test? If the answer is no, then you are perfectly fine and within the boundaries.
When you are about to cash out a positions, much earlier than the original target level, and there is absolutely no reason to cut early, look at your stats, get back your confidence and let it work.
There is no magical pill that will make you disciplined and will ban emotions from your head. It is a process. Long one. Be patient, be prepared and stick to the numbers. Numbers don’t lie.
PRO TIP – Get your trading career started with real money as soon as possible. I’m not saying, go ahead and open a live account with all your savings on day one. No! Take the time, educate yourself, practice as much as needed but the second you feel you are consistent and don’t make critical errors, make it real.
The reason is simple. You will never be able to work on the emotional and psychological part of trading if you don’t trade with real money. Start small. Use money that you can afford to lose but make it real. Live trading (real money) is completely different from demo/paper trading.
Then on the next stage, which is full time trading, you will deal with psychology and emotions on a totally new level. However this is subject for another article!