Have you ever found yourself in a situation where it was critical for you to make a decision in a relatively short amount of time? Most of us have at one time or another. This may have been when making a major purchase and the item you were about to buy was on sale, or perhaps it occurred when a window of opportunity for a career change opened, but was quickly going to close. How did you react to that type of pressure? Did you handle it with grace and make the right decision? Or, did you fold under the pressure finding it easier to not make any decision at all – only to see the opportunity go by the wayside. This inaction is usually followed by a period of lament and thoughts of could have been.
For traders this scenario is commonplace. The task of a trader is to process information, assess risk, and make decisions every day. In addition —and this is very important— the trader has to live with the outcome of that decision. This can be a challenge as we all want to make the right decision, and hate being wrong. This is partly because being wrong somehow implies that we’re not smart enough, or the fact that when a decision turns erroneous, the result is usually a loss.
Newer traders are faced with making a multitude of decisions. How much risk can I comfortably handle? What timeframes work better? What’s the best entry point? And so on. These are just a few of the very important points to consider while trading. The more inputs that have to be thought about, the more stifling the decision making process becomes.
I believe that many traders just put way too much thought into trading. This is especially true for traders who are still trying to gain confidence. The lack of having a concrete plan or not having the right training often leads to plenty of self-doubt. This can be mitigated by having a thorough understanding of a strategy, both from a methodical, as well as from a viability point of view.
For example if you are applying a method of using supply and demand such as we teach here at Online Trading Academy, you would start by looking at a chart specifically for those areas that show empirical evidence of those strong imbalances between the forces of supply and demand. If you’ve perused hundreds of charts and have trained your eye to find these specific patterns, then you can recognize what that picture looks like. The next step is to decide what action to take. At supply levels, we want to sell or initiate a short sale. At a demand level, we buy or cover a short sale. If our rules dictate that we take action that is the point where we have to stop thinking, and begin placing orders.
At the point where we have the orders in the market is when we need to avoid the “what if” complex. This happens when we do too much thinking about the trade we’re about to place. We think too much about the negatives, like “What if I get stopped out,” or “What if I miss the trade,” or something like, “Here I’m trying to get long, but what if there’s bad news out of Europe.” All sorts of things can happen that we can’t control, but as long as the risk is tolerable, and the profit potential is at least three times the risk, we can put on the trade.
As traders we do have to think about managing risk and executing strategy, and that’s about it. Too much thinking about the extraneous events leads to indecision and indecision leads to frustration, which is not conducive to profits. The bottom line is that in trading we have to be much better “doers” than thinkers.
Until next time, I hope everyone has a great week.