Think Like A Trader Blog

Thursday, 5 November 2015

Dealing With Self Doubt When Trading

Self-doubt, that little niggling voice that convinces you you’re being safe by ignoring trades, can have a very negative impact on your trading. We all experience it, so it is important to get on top of it.

‘The market just doesn’t look right. I’ll skip this entry.’’

‘’I don’t like the way that pin bar formed. There seemed like a lot of buying pressure just waiting to come out.’’

‘’The tealeaves are telling me to skip this trade. Phew, thanks tea leaves!’’

Ok, so the last example may not apply to everyone, but you get the idea. You convince yourself into skipping trades. You’re avoiding the uncertainty that comes with trading and you’re trying to limit the fear of not knowing what is going to happen. You may not realise that is what you are doing – you may genuinely believe that the tealeaves are giving a stark warning – but it is.

This type of uncertainty can come after a run of losses, or even after a run of winning trades. After the losses you may think you’re just being extra cautious. After the winners you may believe that the winning streak HAS to come to an end and so you’re trying to filter out the losing trades.

Losses are part of trading. You cannot avoid them. It is the uncertainty that causes so many problems, usually making people blame themselves for losing trades and feeling downhearted instead of accepting the inevitable fact of trading – you will lose trades!

Back test your plan to within an inch of its life. Really test it out on the data available on your charts. I know there’s this whole army of people who say back testing is useless because the market is constantly changing… Let those people believe that! You’re here to make money. To do that you need to become comfortable enough with your plan to accept the losses. If you haven’t back tested and you get two losses in a row, you’ll panic. Three losses in a row and you’ll begin to wonder if the methods still work. Four losses in a row and you’ll be looking for a new system! But if you back test, you will see that the losses come. You will be able to spot the average drawdown you have – maybe the worst in historical data was 5 losses in a row. But if the system is profitable and you’re comfortable with that drawdown then who cares?
Now I don’t mean start testing your system with data from 1950. But do enough testing to make yourself comfortable with it. Because skipping trades means inevitably you will skip winners as well as losers. And those winners are all part of your systems profitability. Skipping them means your success rate drops and thus your profitability.

On the 5 minute timeframe I back test one year. On the one hour timeframe it should be 3 – 5 years.

I hope you’ve all had a great trading week (no tealeaves involved!)

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