The Challenge
Consistently profitable trading requires both confidence and discipline to first achieve and then maintain a reasonable level of success. For virtually all traders, these two aspects of trading are responsible for their success or lack of it: having confidence as a trader, plus the discipline to stick to their system.
Most traders that struggle with their discipline do so for a very simple reason and this is something that can be very easily addressed and rather quickly.
Ask any frustrated or struggling trader what their biggest problem is and it will boil down to a lack of confidence and / or discipline in one form or another. Traders who have both are the ones the that are doing fine and enjoying their trading.
Even the veteran traders will tell you that the primary reason for any rough spells they have occasionally experienced were from when they had a lapse or breakdown in their confidence or their discipline, but once they got it back all was well.
The 80/20 Solution
So how do you go about building these two emotional pillars for successful trading? Or regaining them if they’ve waned?
One of the fastest and most effective ways to give yourself that boost is to intentionally create a disruption in the unsuccessful pattern that has been established. Now this applies whether you’ve known success and temporarily lost it or if you haven’t found it yet.
The most powerful way to disrupt the pattern is through stepping back and making an assessment of your current trading. Now, this doesn’t have to be a lengthy or monumental task. There are two parts to this process and it generally follows the 80/20 rule with which you’re already familiar.
Good news for you is that the first part is the 20% of your effort that will yield 80% of the results. Even better is the fact that you can do this within the next hour or two and see results that fast. Here’s what you do:
Step 1. Effort = 20%, Yield = 80%
Step 1, part 1 is to take your recent trading results and run your metrics on your current trading. So which metrics are going to give you confidence and discipline-building information?
• Your real winning percentage
• Your actual profit-to-loss ratio
• The true size of your average winner
• The true size of your average losing trades
• Your actual number of winning trades
• Your actual number of losing trades
• Your REAL ROI from your trading efforts in both time and $
• Your projected annual income from your trading – based on real numbers from your current trading
So how does this help with your confidence if the numbers don’t look so great? Especially if you haven’t yet experienced a level of success that you desire?
Well, very specifically these numbers give you a very clear reference point to work with regarding the factors in your trading that make the bottom line what it is. Rather than going on hope and wishful thinking, you now know the particular aspects of your trading on which to focus your efforts – a realize results. It brings a great deal of clarity to the exact direction for you to take.
Just this simple step alone with give you a substantial boost, and part 2 will really bring about a transformation.
Step 1 Part 2.
In this part, you simply backtest your system (whatever it is) very specifically according to the rules of the system using recent historical market data for the markets you trade.
You then run the metrics and compare the two. This information is incredibly powerful in two ways for building both your confidence and your discipline to stick with your system. Here’s how this works for you.
By backtesting your system with historical data, this can give you a very clear measure of what your system is capable of delivering for you. If your current trading is not delivering the profits that you want, you need to knowif the problem is with the system or if it in your execution of the system.
If your current trading results are comparable to the backtesting results, then you know immediately that you need to take a closer look at the system you’re using.
If your backtest results are good, but your current results with your system are not, then you know that you need to focus on your execution.
Most importantly, if your system doesn’t backtest well, then you know straightaway that you need to consider changes to the system you’re using, either a new system altogether or changes to the one you’ve got.
Directly for confidence and discipline, if your system tests well, then your confidence in it should go way up, along with your discipline to stick to it – because you are providing PROOF to yourself of its capabilities and limitations and with real numbers.
Plus you can see its limitations and more easily get through short losing streaks and drawdowns while maintaining confidence in your system, thus making the discipline part of sticking with it much easier.
Step 2. The More Intensive Process
If you have gone through the process in Step 1 and find that your system is good but your execution is where you need help, then an outside perspective is where you need to look. Einstein very wisely stated, “We cannot solve problems at the same level of thinking from which they were created.”
If your system has proven out in Step 1, then you need assistance from a trader that knows the questions to ask you to lead you to the root cause(s) of what is getting in your way. Along with the questions, you need specific actions to take based on your specific situation, to address the issue and let you get on with the profitable trading that you know you’re capable of.
For help with your emotional management (which in trading can be a considerable challenge) take a look at the Trader’s Guide To Emotional Management. In it you’ll find the questions and answers you seek.
In conclusion, confidence comes from thorough understanding and successful experience. Once you have a system in which you can have confidence, then the discipline to stick to it gets much much easier.
Analyzing your current trading then backtesting your system can provide a great deal of confidence and thus make sticking to your system considerably easier by knowing the particulars of how it makes your bottom line what it is and what your system is capable of delivering.
Cheers!
Brian
P.S. Don’t make the mistake of dismissing or overlooking simplicity in solutions. Often when we have problem that feels big, our ego will make us think that we need a solution that is big and complex as well. Take this simple step and realize results today!
Get the Trading Performance Analyzer and make this process quick and easy. Go to
