Every trade you enter refl ects a personal judgment you are making. Recent research shows that particularly in forex trading a great deal of psychology is involved. Some of the factors that enter into a decision to trade are rational factors resulting from a great deal of analysis. Personal attitudes about risk, reward, and self-esteem are also important.
Tracking Your Confi dence Level
Every trade you enter refl ects a personal judgment you are making. Recent research shows that particularly in forex trading a great deal of psychology is involved. Some of the factors that enter into a decision to trade are rational factors resulting from a great deal of analysis. Personal attitudes about risk, reward, and self-esteem are also important.
Ultimately, being consistently successful in forex trading requires developing a method that integrates knowledge and judgments.
Getting started in forex trading requires recognizing the role of psychology in the trading decision. A key question that faces the forex trader right at the point of putting on a trade is: How confident are you that the trade is an excellent one? Most people can’t answer the question because they are not really evaluating their trades. The ability to improve your trades requires a basis for self-auditing your own performance.
An effective way of doing this is by applying a rating system. Rate your trade on a scale of 1- 5. A rating of 5 means you believe the conditions are excellent, and you are very confi dent it will work. A rating of 3 means it’s really a hunch trade. A rating of 2 means that you have a hunch, but it is weak. A rating of 1 means there are actually indicators telling you it’s not a time to buy or sell.
How valid is this process of ranking your trades? By rating each trade and then comparing the results, you gain valuable insight into mistakes that were made. Are your losses associated with hunch- rated trades receiving a 3? Are your wins more associated with 5-rated trades? Experience using this system has shown that traders can obtain insight into whether their hunch trades work. If they do, then continue to trade because personal intuition or hunches can be effective. But if losses in hunch trades outnumber the losses in high-rated trades then your hunches are not good and you should treat them as contrarian indicators!
Evaluate your own trades
It is a good idea to evaluate your own trading. Most people, however, do not know how. The purpose of evaluating your own performance is to detect weaknesses or errors in startegy. An effective aproach is what we call a Self-Confi dence Indicator. Using a self-confi dence rating system allows any trader with any level of skills and techniques to evaluate their trades.
Start by taking each trade and asking yourself how confident you are about the trade. Which trades look great and which trades look like hunches? If a rating of 3 is assigned to a hunch trade, then what makes a trade get a 4 or 5, or, on the other side, a 1 or 2? Essentially, a 5 is the kind of trade that meets all the technical conditions for entering.
Envision the following scenario: The price action is in the direction of the key trend. The day trend or 4-hour trend is confi rmed by lower time frames such as 30 or 15 minutes. The price has tested or penetrated a key Fib line, trend line, or moving average. The volatility is at an extreme. In short, the conditions are aligned to permit the entry. A 4
ranking would mean that it’s not meeting every condition but several agree, and there are no contrary indicators. A ranking of a 3 or 2, as we have discussed, is essentially the emotional trade. Your emotions will always be part of trading and needs to be respected. This ranking system allows you to use your intuition, hunches, or other emotional
factors to develop a level of confi dence for a trade. Go for it.
A rating of 1 means that there are important red flags or negative conditions that say don’t buy or don’t sell. Essentially, you don’t do those trades. The use of such a process also improves profitability because high rated trades would receive more lots than lower-rated trades, once you have has really applied this rating to many trades and have established a performance record that lends itself to evaluation. About 20 trades is a good sequence to fine tune the rating system.
Note: Please see Abe’s book “Understanding Forex: Trading to Win” for the remainder of the chapter. Copies can be obtained from the Freebie section of forexhound.com
