Take stock of your trading!
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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 to be able to identify what makes your trading lose or to be able to improve you’retrading performances. This introspection is often painful, we like to put forward our qualities but rarely talk about our defects.
To carry out a trading review, you need to ask yourself several questions. Answering these questions will help you identify where you need to focus your efforts to improve your trading. These can be grouped into two main themes: trading strategy (which includes risk management) and psychology.
Try to answer each question honestly before reading the comments below. The objective is to try to identify your defects to improve your trading.
Question 1: Do you have more losing trades or winning trades?
- If you have more losing trades, it means that your entries into positions are not good. In most cases, you open a position too late, once the movement is already well underway. To avoid these late entries, you should simplify your trading strategy and use fewer technical indicators.
If you use too many indicators, you must wait until all lights are green to open a position and it is already too late to benefit from a movement. First reduce the number of indicators and see if this increases your rate of winning trades. If you do not use a technical indicator, then you are misusing chart patterns and resistances and supports. In that case, you know what to work on.
- If you have more winning trades, it is a sign that your entries into positions are good. If despite this your trades are not winners, then you are mismanaging your position exits. This is a sign that your losing trades are costing you far too much. You must therefore attempt to improve positioning your stop loss but don't question your strategy. It's just your risk management that's not good.
The first rule to follow is to have a risk/return ratio higher than 1 for each of your trades. In other words, your price objective must be further away than your stop loss. If not, you should not open a position. The second rule is to keep losses to a minimum. You must be able to cut your position before your initial stop loss is reached on as many trades as possible. For example, you need to cut your trade if a large candlestick forms in the opposite direction to your trade, raise your stop loss faster if you are winning (to reduce your risk at first and protect your winnings later).
Question 2: Do you regularly experience strong price movements in the opposite direction to your trades?
- If so, it is because the basis of your trading strategy is not good. You can't identify the trend. You should not only analyse your trade’s time unit but also the longer time units. For example, if you trade on 1 hour, you should analyse the 4 hour time unit. If you trade the 15 minute, you should analyse the 1 hour time unit. Your trade’s time unit is what allows you to determine your position entry and exit levels. The upper time unit is what allows you to determine the background trend and set your direction to trade on your trade’s time unit. The trend can be bearish on a 15 minute time unit, but it may only be a simple correction on a 1 hour chart. In this case, you should ignore the 15 minute bearish signals.
- If not, then you know how to identify the trend. This does not mean that you do not suffer sudden price reversals to your disadvantage. You can't do anything about that. From experience, these reversals are the cause of your trades losing 10% of your trades at most.
Question 3: Can you let your winnings run on a position?
- If so, it means you're a swing trader. You try to move with a trend and you are not afraid to lose your winnings. Pay attention however, if you see that your trades are gaining very often and that you regularly close them with a loss that means that you are managing your stop loss badly. It is as important to protect your gains as it is to control your losses.
- If not, it's because you're not cut out for swing trading. It gives you too much stress. In this case, focus on very short-term time units so that you hold your positions for a shorter time. You can even scalp which lets you cut your position as soon as you have a small gain. Pay attention, if you do scalping, your risk management must be concrete. A losing trade must not heavily impact your performance or you will never be able to win at trading.
Question 4: Do you feel more emotions when you have good trading performance or when you test a very promising new trading strategy?
- If you get a lot of pleasure out of testing new trading strategies that will be what you like to do. No matter what the results of the trading strategy you tested, you always want to do more, trying to find the miracle strategy. It's a Holy Grail quest. This quest never stops, you can spend years trading, and your goal is not really to be a winner at trading. Your sub consciousness finds more pleasure in the quest. It's not a sickness... you're just curious by nature.
- If the idea of achieving good trading performance gives you pleasure, it is because you are looking to be a winner at trading. That's your goal. Once you have found a promising strategy, you try to develop it to make it more efficient but you do not question it at the slightest losing trade. You are unhappy and angry with yourself if you have mismanaged your stop loss or if you have not followed your trading strategy to the letter. You are ready to impose rigour and discipline to achieve your goals and to win at trading.
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 novice trader. It is important only to invest the money you can afford to lose. Never invest too much of your savings (see. capital for trading). It puts additional pressure on you that leads to failure in all cases. First test and retest your trading strategy before investing more.
The second possible cause is the fact that you have no risk management. If you don't know how much a trade can cost you before opening a position, you are in unknown territory. The unknown scares everyone. It makes you make irrational decisions, your emotions then guide your trading decisions. It always ends in a total loss of capital. You must learn to manage your risk on each of your trades.
Question 6: Is your trading objective to earn a lot of money or simply to win at trading?
- If your goal is to make a lot of money, you are on the wrong track. You must use reason step by step. Earning money is your ultimate goal but before you reach that goal, there are many intermediate steps. Your first objective might, for example, be to find a trading strategy, then to be able to follow it to the letter for several weeks, to test it in real life with the objective of not losing money, then to optimize your strategy to make it performance better and finally earn money. But be careful, the amount you earn is relative to your initial capital. Don't expect to make a living from trading or make a fortune if you deposit €1,000 into your account. It takes at least several tens of thousands of euros to make a living from trading.
- If your goal is simply to win at trading, you are on the right track. You don't believe in easy money, you know that being a winner takes a lot of work. Profit motive is not your primary motivation and it is easier for you to integrate risk management into your trading.
To carry out a trading review, you need to ask yourself several questions. Answering these questions will help you identify where you need to focus your efforts to improve your trading. These can be grouped into two main themes: trading strategy (which includes risk management) and psychology.
Try to answer each question honestly before reading the comments below. The objective is to try to identify your defects to improve your trading.
Review 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 into positions are not good. In most cases, you open a position too late, once the movement is already well underway. To avoid these late entries, you should simplify your trading strategy and use fewer technical indicators.
If you use too many indicators, you must wait until all lights are green to open a position and it is already too late to benefit from a movement. First reduce the number of indicators and see if this increases your rate of winning trades. If you do not use a technical indicator, then you are misusing chart patterns and resistances and supports. In that case, you know what to work on.
- If you have more winning trades, it is a sign that your entries into positions are good. If despite this your trades are not winners, then you are mismanaging your position exits. This is a sign that your losing trades are costing you far too much. You must therefore attempt to improve positioning your stop loss but don't question your strategy. It's just your risk management that's not good.
The first rule to follow is to have a risk/return ratio higher than 1 for each of your trades. In other words, your price objective must be further away than your stop loss. If not, you should not open a position. The second rule is to keep losses to a minimum. You must be able to cut your position before your initial stop loss is reached on as many trades as possible. For example, you need to cut your trade if a large candlestick forms in the opposite direction to your trade, raise your stop loss faster if you are winning (to reduce your risk at first and protect your winnings later).
Question 2: Do you regularly experience strong price movements in the opposite direction to your trades?
- If so, it is because the basis of your trading strategy is not good. You can't identify the trend. You should not only analyse your trade’s time unit but also the longer time units. For example, if you trade on 1 hour, you should analyse the 4 hour time unit. If you trade the 15 minute, you should analyse the 1 hour time unit. Your trade’s time unit is what allows you to determine your position entry and exit levels. The upper time unit is what allows you to determine the background trend and set your direction to trade on your trade’s time unit. The trend can be bearish on a 15 minute time unit, but it may only be a simple correction on a 1 hour chart. In this case, you should ignore the 15 minute bearish signals.
- If not, then you know how to identify the trend. This does not mean that you do not suffer sudden price reversals to your disadvantage. You can't do anything about that. From experience, these reversals are the cause of your trades losing 10% of your trades at most.
Psychological assessment of your trading
Question 3: Can you let your winnings run on a position?
- If so, it means you're a swing trader. You try to move with a trend and you are not afraid to lose your winnings. Pay attention however, if you see that your trades are gaining very often and that you regularly close them with a loss that means that you are managing your stop loss badly. It is as important to protect your gains as it is to control your losses.
- If not, it's because you're not cut out for swing trading. It gives you too much stress. In this case, focus on very short-term time units so that you hold your positions for a shorter time. You can even scalp which lets you cut your position as soon as you have a small gain. Pay attention, if you do scalping, your risk management must be concrete. A losing trade must not heavily impact your performance or you will never be able to win at trading.
Question 4: Do you feel more emotions when you have good trading performance or when you test a very promising new trading strategy?
- If you get a lot of pleasure out of testing new trading strategies that will be what you like to do. No matter what the results of the trading strategy you tested, you always want to do more, trying to find the miracle strategy. It's a Holy Grail quest. This quest never stops, you can spend years trading, and your goal is not really to be a winner at trading. Your sub consciousness finds more pleasure in the quest. It's not a sickness... you're just curious by nature.
- If the idea of achieving good trading performance gives you pleasure, it is because you are looking to be a winner at trading. That's your goal. Once you have found a promising strategy, you try to develop it to make it more efficient but you do not question it at the slightest losing trade. You are unhappy and angry with yourself if you have mismanaged your stop loss or if you have not followed your trading strategy to the letter. You are ready to impose rigour and discipline to achieve your goals and to win at trading.
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 novice trader. It is important only to invest the money you can afford to lose. Never invest too much of your savings (see. capital for trading). It puts additional pressure on you that leads to failure in all cases. First test and retest your trading strategy before investing more.
The second possible cause is the fact that you have no risk management. If you don't know how much a trade can cost you before opening a position, you are in unknown territory. The unknown scares everyone. It makes you make irrational decisions, your emotions then guide your trading decisions. It always ends in a total loss of capital. You must learn to manage your risk on each of your trades.
Question 6: Is your trading objective to earn a lot of money or simply to win at trading?
- If your goal is to make a lot of money, you are on the wrong track. You must use reason step by step. Earning money is your ultimate goal but before you reach that goal, there are many intermediate steps. Your first objective might, for example, be to find a trading strategy, then to be able to follow it to the letter for several weeks, to test it in real life with the objective of not losing money, then to optimize your strategy to make it performance better and finally earn money. But be careful, the amount you earn is relative to your initial capital. Don't expect to make a living from trading or make a fortune if you deposit €1,000 into your account. It takes at least several tens of thousands of euros to make a living from trading.
- If your goal is simply to win at trading, you are on the right track. You don't believe in easy money, you know that being a winner takes a lot of work. Profit motive is not your primary motivation and it is easier for you to integrate risk management into your trading.
