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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