It is granted that you will come across psychological issues when you are planning a trade or in any other business development. Instead of looking at those issues, why don’t you have a look at yourself and evaluate? Try to find out even if you are ready to trade or not. If you come out with a “no” answer, then you need to stop trading and start your preparation immediately. It can save you thousands of dollars.
How well do you know yourself?
While answering this question, you should be able to find out your strengths and weakness. Since you should be confident about your strategy and plan, you must make sure that you don’t have any psychological issues, as this can affect you’re trading. You should have a solution to that problem. Make a list of beliefs you are having about the market. It is necessary to consider all these factors before coming to the market. This prepares you to withstand the market volatility. Rate yourself on all of these parameters on a 1 to 10 scale.
Do you have a business plan?
A business plan for your trading is not the usual business plan people make for other businesses. There is a lot of difference between the two. Also, You’ll need to make changes to this plan with time regularly. You cannot follow the same plan for the rest of your life. You can consider making a checklist and look at each step in that list, before entering a trade. The list can include the following items.
- Your beliefs about the market situation
- Strengths, weakness, and psychological issues, etc.
- The various news events and economic announcements.
- Theories that support your belief and your trade plan.
- Risk management during ‘worst-case scenario’.
Now rate yourself on a 0 to 10 scale, against each item of the checklist. Also, check to what extent have you included these points in your business plan.
Is the system developed by you suitable for you and the current market?
Any system you develop must have the entry and exit conditions. The exit condition should be such that it results in a maximum loss of one unit of risk (1R). Whether there are multiple exit points or re-entries in between the trade, also is a part of the system. You should also know the right time to take full profits or to book a loss without waiting any further. These are the characteristics of a sound system.
Again rate yourself on a scale from 0 to 10. See if the ratings are getting better with time. If yes, this means you are on the track of development.
How many of your trades are right?
You should count the number of correct trades and wrong trades. Not just right trades but along with that, what is the total risk to reward extracted. If you have made changes in your stop loss, how much have you lost in total after the trades hit your stop loss?
Which type of market is most suitable for you?
You should have a clear idea about the type of market you are comfortable trading in. The market is usually in one of the following states:
- Placid upmarket
- Volatile upmarket
- Placid sideways market
- Volatile sideways market
- Placid down market
- Volatile down market
Now, calculate the rewards you have gained in each of these markets. The one which has the highest rewards is the most suitable market for you. This data should be collected over a sample of a minimum of 30 trades.
Are you using your strategy for one market type only?
You might be using your strategy always, irrespective of the type of market. You should stop doing this as there is only a specific type of market where your strategy will work the best. Different markets have different variables. So you might be disappointed when your system does not work at times. This also can affect your psychology.
Have you done proper position sizing?
Position sizing is a critical aspect before placing a trade. You need to trade with the quantity that’s proportional to your account size. You should not be risking more than 1% of your account. There are position sizing algorithms that will give the right amount of quantity. You can rate yourself based on how well you have done your position sizing.
Are you doing everything possible to eliminate your trading issues?
This starts with identifying your issues, then evaluating them. Next, you need to come with a solution for each problem. If you are not facing any of these issues, later on, that means you are overcoming your psychological barrier. You can improve a lot more by believing in your solution and technique. That can be accomplished by simply holding the firm belief that you have solved the issue successfully without keeping any further doubt.
In the end, you should know if your risk level is at a tolerable level. The above self-assessment procedure will prepare you psychologically for trading or can make you a better trader. If there is any area where you are lagging, then you should start working towards it immediately. Include that in your business plan and develop a system that will fit you.
Preparation is the key to success. Based on your rating of yourself, you can decide if you are very well prepared to trade or not. Do not forget to do these tasks regularly.