To find consistent profits you need to have confidence. In fact, confidence is the most important ingredient for trading success. Confidence will help you profit with an average trading system, but
without confidence you will be unable to find success, even with a brilliant trading system.
You will find that there are two different types of confidence problems for forex traders:
(1) a lack of confidence in the trading system, or
(2) a lack of confidence in yourself.
THE ORIGIN OF CONFIDENCE ISSUES
All traders will have losing streaks. Losing streaks may lead to feelings of inadequacy and disparity. However, if the trading system is a valid winning trading system, it has been tested, and is profitable over the long run, there is probably nothing wrong with the system. Most of the time,
a losing streak is due to the wrong application of the trading system.
In other words, most losing streaks are due to the misapplication of the system (caused by the trader), and not the system itself.
There are several common issues that many traders have, all of which may lead to losing streaks and confidence issues.
It is important to note that without proper application of risk management rules, a trading drawdown may be exacerbated and, therefore, may be very difficult to handle for many traders.
Traders who have issues with risk management will usually multiply their drawdown and find it difficult to make money consistently.
Normal, everyday losing streaks are unfortunate and difficult for many traders to endure, but
when these drawdowns are accentuated by poor risk management, the results are often disastrous.
Problems with Discipline
Discipline problems are common. Many traders at banks are not brilliant traders (in fact, many retail forex traders are much better traders than bank traders). Bank traders do not have a
sixth sense for the markets. These traders do not have access to secret algorithms or indicators. Many traders are consistently profitable because there is a built-in discipline system at the bank.
Bank traders have a risk manager. The risk manager ensures that the bank trader trades with discipline. The bank hires intelligent trainees to become disciplined traders on the forex desk. The risk manager ensures that the bank traders do not risk too much on their trades.
All the bank traders must follow one simple rule: They must not take more risk than they are allowed. Each bank trader knows how much he may risk, every bank trader has a number, and his risk cannot exceed this number.
The risk manager on the forex desk oversees the risk associated with each of the trades taken by the traders. If a trader takes on too much risk, the trader is warned once. If a trader makes this
mistake again, the trader loses his job. These are the rules.
Each bank trader understands this, and the forex trading desk is set up to tightly manage risk.
The interesting thing about this system is that even those traders who are exceptionally profitable—the traders who make millions for the bank— even these traders are shown the door if they take on too much risk.
Banks understand trading is a game of risk. All the bank traders must be disciplined traders. Any
trader who steps out of line is a severe concern for the bank. Retail forex traders such as you and I do not have a risk manager. However, it is possible to re-create the bank system. This is how you can do this: become accountable to someone.
Find a trading buddy, your partner, a relative, anyone you respect. Offer them your trading
statement each week. This is your report card. Report the risk for each trade. Be accountable to this person. If you take on too much risk (win or lose), your risk manager should reprimand
you. Perhaps your “risk manager” will change your trading platform password so you are unable to trade for one week if you take on too much risk.
You must learn to keep risk manageable if you want to consistently extract profits from forex trading.
If you have a losing streak, you may become too careful or too reckless with your trading system. This is a common reaction to a drawdown. This often leads to a downward spiral. It is important to keep track of what you are doing. There are many ways to do this, but be
most common way is to keep track of your trading. To make sure that you are not changing your trading rules, do one of the following: Take screenshots of your trades before you take the trade (the set up), during the trade, and after the trade is closed.
You may also want to create a trading journal. This journal should include information such as why you decided to take the trade, the system you employed for the trade, your feelings about the
trade, the result of the trade, and a rating on how well you applied the rules of your trading system to that particular trade.
Alternatively, you may set up a video journal; there are many software options for this, some of them freely available on the Internet, but a popular one is called Jing, which will allow you to take
a quick recording of your trade. A final option would be to look over your trading printouts—in other words, your trading record. This is another place where you may notice what is happening,
why you are changing your trading, and what exactly you are doing that is different to your system.
The key to combating this problem is to become aware, more self-aware of what you are doing as a trader. Just as a professional gardener does not mow the lawn the same way every single week, you may not be taking your trades the same way even though you are trading the same system.
Taking records of what you are doing is invaluable for self assessments later, in order to look at exactly how you are executing your trades and what changes you might be making. Missing Out
Traders may end up with a losing streak simply because they miss out on some trades.
This is a particularly difficult problem for those traders who have a low win rate. It is obviously possible to be a successful and profitable trader—in fact to be a professional trader—with a
trading system that has a very low win rate. The problem is that if winning trades do not occur that often, it is imperative that all trades are taken to make sure the winners are captured.
If you trade a system that has a low win rate, and you miss out on some of the trades, and these trades end up being large winners, it can be disheartening. Obviously, if you trade a system with a
very low win rate, you need large winning trades to maintain profits. Missing out on these winners can be psychologically demoralizing; it can be difficult to maintain your confidence in a trading
system with a low win rate.
There is an easy solution, however.
If you want to make sure that you do not miss out on trades, or miss out on trading information so that you can manage trades, technology may be your answer. Today, there are many technical
solutions for the naked trader.
Technology today allows traders to be almost anywhere and still manage the trades. The key is to be prepared. It is possible for the naked trader to simply trade from a phone. With well-equipped
phones, naked traders are able to not only to place trades and manage trades, keeping tabs
on live market charts, they can also set alerts. If the market goes to a predetermined price level,
traders will receive e-mails or alerts on their phones.
On the Internet, there are services that allow you to set price alerts, so that once the market crosses a price level you receive an e-mail. If you receive e-mails on your phone, you should know
nearly immediately if the market reaches a predetermined price.
CONFIDENCE IN YOU
Your confidence may ebb and flow; this is part of trading. There are some easy tricks you can do to keep a steady stream of confidence in your trading life. You can do three things, and if you practice
these consistently they will help to maintain your confidence.
Step One: The Reasons for Your Success
In order to be confident as a trader, you must consistently execute your trading system as it was outlined in your system rules. More importantly, you must know, without a doubt, the reason
why you have chosen to execute your trading system.
In other words, your beliefs must align with your trading goals. This is a foreign concept to
most traders. Many traders assume that they want to make money, and if they are not making money, the reason is that they have not found the trading system that will allow them to make money consistently.
Notice how the emphasis for most traders is on the system. The system yields the reward. The system is responsible for profits.
Unfortunately this emphasis on the system is incorrect. The only traders who do not have to concern themselves with the psychology of trading are those traders who use automated trading
systems. You are influencing your trading results regardless of whether you acknowledge
this fact. Unless you are trading a purely mechanical system—a pure automated trading system, you are influencing each and every one of your trades.
Your thoughts, your beliefs, and whether you believe you are deserving of profit all influence how you trade your trading system. Think about and write down your answers to the following:
How many wealthy people do you spend time with?
Do you think that you will one day have a lot of money?
When something goes wrong with money, do you think that this is “just your luck?”
When you see a wealthy person, what do you think?
Do you think that wealthy people are good people?
If you become extremely wealthy, are you worried that your personality may change?
Aligning your trading goals with your financial personality is important and something that will occur regardless of whether you are consciously aware of this.
Step Two: The Rewards of Routine
The trading system you employ depends on you. You must identify and execute trades. You must apply the risk management rules to each of your trades. You must remain vigilant and ensure
that you take all the trades that your system identifies as high probability trades. In order to achieve all this, you must have an established routine. This routine must be written down, and it must include all the important variables for your trading system.
The rules for your trading system must include your trading routine. Define what you will do, and what you will not do regularly. This will be your trading routine. Adherence to your trading routine is the closest thing you have to insurance against sloppy trading. Sloppy trading involves missing
trades, trading the wrong lot size, placing the stop loss at the wrong price, or poor
execution when entering a trade.
At a minimum, this is what you should have written down for your trading routine rules:
When will you look for trades?
How will you calculate your trade size?
How often will you check the charts?
How will you be alerted to trading opportunities?
How will you be alerted when you need to manage your trades?
Defining your trading routine is important because, over time, as you begin to consistently capture profits, you will gain confidence in what you do. The simple act of entering your trade into the
risk calculation spreadsheet will often bring an anticipation of profits to come. There is great power in routine.
Step Three: The Machine
If you have aligned your personal beliefs with your trading goals, and if you have designed a well-planned trading routine that you can adhere to, you are now ready to put into place fail-safe rules and tools so you may quickly regain your confidence when it wavers.
The fastest way to regain your confidence is to backtest in a forex tester. A losing streak can be put into proper perspective after you have traded the GBP/USD over three years and found consistent profits in a forex tester using the very same system that has you in a drawdown. Back-testing in
general is a one-size-fits-all remedy. Not only does backtesting help your confidence during a losing streak, but it also helps you to concentrate on what is important in your trading system.
The simple act of taking 50 trades in a forex tester (or your chosen back-testing software) adds
another 50 trades under your belt. You will have honed your skills to identify valid trade set-ups and execute valid trades within the confines of your system.
Spreadsheets can also help you. If you can, make some spreadsheets with the data from your back-testing sessions. These data will help put drawdowns into perspective. Having the statistics
in front of you is evidence that your trading system works, and you may need to trot these data out when you are experiencing a losing streak, to remind yourself that what you are doing is