Confidence is possibly a trader’s best friend. And yet trading tends to bring out the worst in people. Confident men & women that have achieved a significant status in life often crumble when they face the inherent uncertainty of the market.
So in this short post, I’ll share my thoughts on confidence and what might help you achieve it.
I think there’s a difference between self-confidence and being confident at your job (whether you’re a baker, a salesman, or a trader). Self-confidence is, in essence, a strong belief in your own intelligence. Self-confidence means you believe in your own ability to evolve and face whatever life throws at you.
Of course, self-confidence doesn’t mean stating “I can do anything!” but rather, “I can find a way to do anything I want to do” and “I can find a way to solve these issues at hand”. We are all unique. For as hard as it may be to hear, most people aren’t cut out for trading. To make matters worse, trading and investing usually attracts people with a gambling mentality. These are the usual suspects that overleverage into trades, focused on micro timeframes looking for a quick way to riches and instead find a quick route to financial ruin.
Self-confidence is about knowing yourself: knowing your strengths, and trying to play towards them; knowing your weaknesses and striving to overcome them. And above all, accepting yourself, with all pros and cons, in a non-judgemental way. This is the only way to overcome external (and internal) judgement (because people will never fail to point out your faults) and make sure you’re on the right path.
Many psychological issues that drag aspiring traders into depression can be overcome by simply admitting that for some reason (usually connected to ego, capitalization issues, pressure from peers or an outright dislike) trading is not the right path for them.
Confidence through Competence
But if you’re truly honest with yourself, and you find trading actually feasible, then we can approach the quest for confidence as a trader. Confidence, as a trader, can only come through competence.
Trading, in practice, essentially boils down to a long series of decisions:
- what to trade
- when to trade
- how much to risk
- where to enter
- how to manage the trade
- when to pull the plug on the trade
…over and over again.
The only way to make these decisions confidently is to have firstly demonstrated to yourself that you are actually competent. This competence can be built slowly but steadily, by following a functional decision-making framework. You need to build some sound practices around valid principles – not the other way around. Don’t waste time backtesting in the search for something that “worked”. There’s no future in that. Instead, start with the principles. Then go about finding ways to put them into practice. Principles like:
- the trend is your friend
- cut your losses
- ride winners
- never add to a losing trade
- never cut your profits short
Aspiring traders should formulate solid trading plans which follow sound principles. Confidence comes from understanding the reasons why you’re trading in the first place, knowing where your trade might encounter trouble, having a plan, and knowing where to pull the plug if things go sour.
Once you’re in the trade, confidence helps you maintain your discipline and stick to your stops and aim for your targets so long as market conditions have not altered or shifted since opening the trade. This means having confidence in your own ability to understand market drivers, read the technicals and if you see something you don’t like scratch the trade. The key to FX is there’s always another opportunity.
Over to You
To rephrase the key concept: competence comes from disciplined repetition of solid trading practices. It’s about picking a method (for example, trend following) and specializing (without optimizing). But whatever you do, remain consistent. Consistency means sticking to your guns. Without consistency, there’s no way to properly analyze your results. You won’t know what or how to correct if you’re changing your rules after each trade.
Hindsight will blind you – hence the focus on principles and on consistency. As you specialize, and work the market from one angle, you will be gaining relevant experience and you’ll also be “fine tuning” your instincts.
If you can do this, your trading will never be the same, for the better.
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.