Whether you started trading a few weeks ago or several years ago, taking stock of your trading is essential to progress. You need to ask yourself the right questions in order to identify what is making your trading lose or to improve your trading performance. This introspection is often painful, we like to put forward our qualities but rarely talk about our defects.
In order to make this trading assessment, you need to ask yourself several questions. The answers to these questions will allow you to identify the elements on which you must concentrate all your efforts to improve your trading. They can be grouped into two main themes: trading strategy (which includes risk management) and trader psychology.
Try to answer each question honestly before reading the comments below. The objective is to try to identify your shortcomings to improve your trading.
Assessment of your trading strategy
Question 1 : Do you have more losing trades or winning trades?
If you have more losing trades, it means that your entries in position are not good. In most cases, it’s because you are entering positions too late, once the movement is already well underway. To avoid these late entries, you need to simplify your trading strategy and use fewer technical indicators.
If you use too many indicators, you have to wait until all the lights are green to take a position and it is already too late to profit from a move. Reduce the number of indicators first and see if this increases your winning trade rate. If you are not using a technical indicator, then you are not using the chartist patterns and the resistance and support patterns correctly. In this case, you know what you need to work on.
If you have more winning trades, it’s a sign that your position taking is good. If you are not winning in your trading, then you are not managing your exits well. This is a sign that your losing trades are costing you too much. You should therefore look to improve the positioning of your stop losses but do not question your strategy. It is simply your risk management that is not good.
The first rule to respect is to have a risk/return ratio greater than 1 for each of your trades. In other words, your price target must be further away than your stop loss. If this is not the case, you should not take a position. The second rule is to limit losses as much as possible. You must be able to cut your position before your initial stop loss is reached on as many trades as possible. For example, you should cut your trade if a large candle forms in the opposite direction of your trade, move your stop loss up faster if you are in profit (to reduce your risk at first and protect your gains later).
Question 2: Do you regularly experience strong price movements in the opposite direction of your trades?
If so, it means that the basis of your trading strategy is not good. You don’t know how to identify the trend. You should not only analyze the time unit of your trade but also the higher time units. For example, if you are trading the h1, you should analyze the h4. If you are trading the 15min, you should analyze the h1. The time unit of your trade is what allows you to determine your entry and exit levels. The upper time unit is what allows you to determine the underlying trend and set a direction to trade on the time unit of your trade. The trend may be down in 15min but it may be a simple correction on an h1 chart. In this case, you should ignore the 15min bearish signals.
If not, then you know how to identify the trend. It doesn’t mean that you don’t experience sudden reversals in your favor. There is nothing you can do about it. From experience, these reversals are the cause of losing trades in a maximum of 10% of your trades.
Psychological assessment of your trading
Question 3 : Do you manage to let your profits run on a position?
If so, you are a swing trader. You are looking for trendy movements and you are not afraid of losing your gains. Be careful though, if you see that your trades are very often in profit and that you regularly close them in loss, it is because you manage your stop loss badly. It is as important to protect your gains as it is to control your losses.
If not, then you are not cut out for swing trading. It gives you too much stress. In this case, move to very short term units to keep your positions for less time. You can even practice scalping which allows you to cut your position as soon as you have a small gain. Be careful, if you do scalping, your risk management must be concrete. A losing trade must not have a heavy impact on your performance otherwise you will never be able to win in your trading.
Question 4: Do you feel more emotional when you achieve a good trading performance or when you test a new and promising trading strategy?
If you get a lot of pleasure from testing new trading strategies, it’s because you like to search. No matter what the results of the trading strategy you tested, you always want to have more, looking for the miracle strategy. It’s a quest for the Holy Grail. This quest never ends, you can spend years trading, your goal is not really to win in your trading. Your unconscious mind finds more pleasure in the search. It’s not a disease… you’re just curious by nature.
If you get pleasure from the idea of performing well in your trading, you are looking to win in your trading. That is your goal. Once you have found a promising strategy, you seek to develop it to make it more successful but you don’t question it at the first losing trade. You are unhappy and angry with yourself if you mismanaged your stop loss or did not follow your trading strategy to the letter. You are ready to impose rigor and discipline on yourself in order to win in your trading and achieve your goals.
Question 5: Are you afraid of losing your money?
If so, there are two possible causes. Either you have invested too much money in the financial markets, which is a mistake for a beginner trader. You should only invest money that you can afford to lose. Never invest too much of your savings (see capital for trading). This puts extra pressure on you and will always lead to failure. You need to test your trading strategy first and try it out before you invest more.
The 2nd possible cause is the fact that you have no risk management. If you don’t know how much a trade can cost you before you take a position, you are in the unknown. The unknown scares everyone. It makes you make irrational decisions, your emotions guide your trading. It always ends in a total loss of capital. You have to learn to manage your risk on every trade.
Question 6: Is your trading goal to make a lot of money or just to be a winner in your trading?
If your goal is to make a lot of money, you are on the wrong track. You need to think step by step. Making money is your ultimate goal but before you reach that goal there are many intermediate steps. Your first goal may be to find a trading strategy, then be able to follow it to the letter for several weeks, test it in real life with the goal of not losing money, then optimize your strategy to make it perform and finally make money. But be careful, the amount of your earnings are related to your starting capital. Don’t expect to make a living from trading or to make a fortune if you deposit $1000 in your account. You need at least tens of thousands of euros to make a living from trading.
If your goal is to simply be a winner in your trading, you are on the right track. You don’t believe in easy money, you know that being a winner requires a lot of work. The lure of profit is not your primary motivation and it is easier for you to integrate risk management into your trading.