Its easy to forget what makes us money sometimes. Profitable traders, and non profitable traders alike, go through phases where they oftentimes forget what it was they did when they were making money.
We get into grooves, and start to get comfortable in our routines. The level of comfort, though instantly gratifying, can cause us to turn our winning streaks right around into much worse, devastating losing streaks.
As traders, we have to stay on our toes. We can’t afford to let our levels of comfort get the better of us, as one bad trade managed improperly could potentially wipe out all of our hard work and efforts. Every trade counts, and every trade needs to be carefully assessed. The ones we let go are the ones that lead us into disaster.
In trading, the glass should be half empty
Before I take a trade, I will ask myself a series of questions. The biggest ones are listed below, and going though this general checklist has allowed me to maintain consistency and run a profitable business. I take these questions very seriously and pay attention to each and every one of them; one mistake could lead me down a road I never wanted or intended to take. Whether it be my own personal money I am managing or that of others, a trade is a trade, and money is on the line that will affect my well-being.
Some questions I ask myself before hitting ‘buy’ or ‘sell’:
- Is the trade in line with the fundamental/technical trend?
- Are ALL of my conditions for entering the trade being met?
- If I am fading a level, is momentum too strong/price leading up to it too steep? Should I look to buy a breakout of the level instead?
- Is the setup clear and definable to the majority of traders across the world?
- Am I taking this trade because its clearly a high probability trade / the best of the best?
- I’m not taking this trade based on a “hunch”, am I?
- Am I taking this trade because I am bored, anxious, or haven’t taken any other trades all day and are “forcing” the trade?
- Am I taking this trade only because it looks to be simply “oversold” or “overbought”?
- How is my confidence level on this trade? Am I overly worried about taking it?
- What am I going to do if the trade goes against me? Am I going to reverse the postion and buy a breakout/fade it or just take the loss?
- Do I have a clearly defined profit target?
- Do I know how much I am willing to risk on the trade?
- Does my risk:reward ratio work out in line with my long-term money management plan?
As a personal trader, it is easy to get comfortable in your own familiar environment and forget about the actual undesirable consequences of what it is you are doing. Like any business, there is risk involved, and trading should be treated as a business, and nothing less. Focusing on the upside is a VERY easy thing to do; focusing on the downside is sometimes not. By shifting mentality and looking more so at the potential downside of things, most people tend to scale down position size, more objectively assess their trades, cut obvious losers very quickly, etc.
This optimism gets the better of most people, and it hurts them terribly. I’m not suggesting walking around with a frown on your face, but rather shifting your focus from potential upside to potential downside when it comes to taking trades. Pessimism in trading is not necessarily a bad thing, because it raises questions, doubts, etc, and therefore cuts out the number of losing actions you take. It makes you more carefully analyze the situations you find yourself in, and therefore make better judgment calls to achieve profitable outcomes.
Focusing on what can go wrong rather than what can go right has saved me a lot of trouble over time. Doing a simple check of relevant factors before taking your trades can free up a lot of time in the long run making up for and worrying about past mistakes, and maintain a solid winning streak.
I am asked quite frequently what it is that helps my performance more than anything else. If I had to boil it down to one thing, it’s that I wait. I simply won’t trade unless I cover all my points above and take only the best opportunities that come my way, and fit my criteria. But in order to do that, I need to ask myself a series of questions that allow me to make the judgment call to either jump in or stay out.
Worry, in this sense, is certainly not a bad thing.