Building Confidence in Trading (2024)

It should go without saying, but confidence is essential to trading or anything we set out to do, for that matter. There are certain ways to approach building confidence, maintaining it, and making sure you stay on track.

Having a gameplan is paramount

A lot of traders approach the market without having a defined game-plan, that is, not having a full understanding of what their methodology is for identifying trade set-ups as well as what type of strategies they want to deploy to take advantage of their analysis.

Having a road-map in of itself will get you started off on the right foot and instill confidence before you get into the ‘heat of battle’. The following are key factors to know…

Know your methodology and toolbox

There are countless ways to analyze markets with no truly right or wrong approach. The key point here is that you have a methodology, and a relatively simple one, as too much complexity causes paralysis by analysis, an obvious enemy of confidence.

In addition to understanding your toolbox, whether it be technical, fundamental, or a combination of the two, you should have specific trade set-ups outlined that provide you with an edge, or statistical advantage over time.

What time-frame are you most comfortable with?

You should have a targeted time-frame. For example, the daily and 4-hr time-frame are excellent time-frames to concentrate on when trading FX. They provide ample information and opportunity, while slow enough that you aren’t forced to make decisions on the fly.

This is where day-trading can become quite difficult, as it is mentally taxing due to the pace at which markets can fluctuate in such a short time. This is also why day-trading holds such an allure, but you need to understand if it is for you or not first before diving in.

You need to be consistent with your trade objectives – don't turn day-trades into swing-trades and swing-trades into day-trades, know your intentions ahead of time and stick to it. This will help steer clear of indecision, another clear enemy to confidence.

Which markets will you focus on?

Know the markets that you are trading and keeping your universe small is always a good idea. Not all asset classes or even instruments within the same asset class move the same, they have their own personalities. Knowing the behavior of a small universe of symbols will give you more confidence.

Understand your tolerance for risk.

One of the big mistakes traders often times make, is they tend to trade with too much risk. When you trade beyond what you’re capable of you will not only suffer outsized losses but your judgement becomes impaired. Once fear sets in, it’s easy to lose objectivity and make even more mistakes. The accumulation of losses and mistakes of course then leads to a loss of confidence.

What is an acceptable loss-per-trade, 0.5%, 1%, 2% etc.? This varies from person-to-person, and is dependent on strategy type and time-frame you're focused on.

Breakout strategies have lower win percentages, but typically higher risk/reward ratios, while mean reversion strategies typically have higher win percentages with lower risk/reward ratios.

Trading breakouts will typically mean more consecutive losses, thus it is a good idea to trade with smaller size as a string of losers can add up quickly.

The latter, you still have to account for a string of losers, just perhaps not as many.

This is where looking at your trade history can help in determining how many losers in a row you could suffer (add a few extra in for good measure) and multiply that by the amount you risk per trade.

Can you handle that max figure? If not, adjust your size down. For example, if you see that you have had several instances of losing on six or seven trades in a row, then increase that to ten and multiply it by how much you risk per trade. This will give you a figure to work with in understanding how much of a drawdown a string of losers may cause.

As risk pertains to timeframes – If you are trading longer-term time-frames, then you can risk more per trade due to lower frequency and larger expected moves.

On the extreme end of the spectrum, if you are day-trading you could experience a large number of losers in a short period of time leading to an outsized accumulation of losses at a rapid rate.

Focus on the process, not the results.

This is easier said than done, but if you have a game-plan in place and can accept what you have at risk, focusing on the process of making good trades becomes significantly easier.

Utilizing a check-list, whether it be physical (beginners) or mental (advanced), can ensure you are checking off the right boxes before entering into a trade.

By being able to check off the appropriate boxes for a trade set-up, entry/exit(s), risk, etc., you build confidence in knowing you are doing theright thing, and have a plan in place for all scenarios.

It will also help keep you out of trades that you probably shouldn’t be involved with in the first place. Those types of low quality trades that end up as losers ultimately undermine your confidence in your ability to make good decisions.

Confidence all about maintaining self-efficacy.

How to maintain confidence

Perform periodical reviews of your trading journal and your trade history. This will help you correct course before you stray too far off of it.

Journaling and trade reviews are excellent at helping you do just that. You will see that you are doing some things well (do more of that) and doing some things poorly (figure out how to fix before it results in costly errors).

How to repair damaged confidence

When you are experiencing a large drawdown, first thing is first – get out of the fire. Take a step back from trading, you are almost certain to find immediate relief. Once you’ve had time to recuperate, study over your trade history and look for the mistakes that led to the drawdown.

Once you’ve isolated what you’ve been doing wrong, start trading again with reduced trading size. Get a few good trades on the board before returning to a normal trading size.

The focus here is not to make a lot of money, but rather restoring your confidence without causing further damage.

Overconfidence

After a profitable run you feel confident, which is good, but not if it enters into the overconfident zone. It’s just as important to learn how to handle success as it is to handle failure. If you don’t humble yourself, the market will do it for you.

As soon as you feel like you have it all figured out and maybe even begin to feel yourself getting a little out of control, it’s time to double-down on your efforts of making sure you are following your trading plan and process.

Remember: Winning trades can be bad, losing trades can be good. If you take a trade according to plan and it results in a loser, that is just part of trading, but still a good trade. But if you take a trade outside of your game-plan and it makes you money, this is a bad trade.

Why? Because over the course of many trades this will ultimately do you more harm than good.

For the full conversation, please see the video above…

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX