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In today’s episode, you’ll discover how to tell if you’re on the right track in trading.
So listen to it right now…
Forex Risk Management and Position Sizing (The Complete Guide)
How to Create a Trading Journal and Find Your Edge in the Markets
Hey, hey, what’s up my friend? In today’s episode, I want to talk about how to know if what you’re doing in trading is correct.
Because here’s the thing for trading, it’s not like in school where you get praised by your teachers it means that you’re a good student and you’re doing something right, while you get scolded or punished or get caned it means you’re a bad student and you’re doing something wrong.
It’s not quite straightforward in trading because you can make money on wrong trading decisions by averaging into your losses, widening your stop loss.
But at the same time, you can also make the right trading decisions and lose money. You can see that in trading, it’s not as clear cut. This is why in today’s episode, I’m gonna share with you a few things to look for to ascertain that you’re on the track and making the right trading decisions.
1. You must have a trading plan
A trading plan is a framework, that tells you what exactly to do, where to buy, when to buy, how much to buy and sell, whether you’re trading stocks, forex, futures whatsoever. This is what a trading plan does for you. It’s like a framework to guide your trading decisions.
Because if you don’t have a framework, if you don’t have something to fall back on to get your trading decisions, then you’ll be trading based on emotions. You will be trading based on subjectivity. You’ll be trading based on your gut feelings.
And if you are trading based on emotions, gut feelings whatsoever, I’m sure you can agree that your actions won’t be consistent. If you’re in a good mood, you may do something different. If you’re in a bad mood, your trading actions might be different.
In the long run, what you’re going to get is inconsistent trading results, and that’s a big step backwards. This is why you need a trading plan, a framework to guide your actions. once you have a consistent set of actions, you will then get a consistent set of results.
2. You must have a trading journal
Every time you put on a trade, you’ll record those trades down in your trading journal, you’ll write things like:
- Your trading setup
- The markets that you’re trading
- Your entries
- Your stop loss
- Your profits
And the purpose of your trading journal linked to your trading plan because if you follow your trading plan, then your trading journal will be the trading setups that are according to your trading plan, whether you trade breakouts, trend continuations, etc.
Your trading journal will be kind of linked to your trading plan. It will be trades that are taken according to your trading plan. And this is where things get interesting.
If your trading journal, let’s say after 100 trades, 200 trades, you realized that you are making money from your trading, it shows that you might have an edge in the markets or you are doing something right
But at the same time, your trading journal could also show you that you are losing money in the long run. This tells you that your trading plan is not working as well as it should be.
Maybe your trading strategy needs refinement and tweaking. And the only way you’ll notice that is if you have a trading journal, if you have something there to look back on and see your progress over time. And that’s the power of a trading journal.
It helps you improve your trading results. It tells you where you are headed towards, and whether you need any refinement or tweaking. This is where your trading journal comes into play.
That’s number two. You must journal every single trade that you take, especially if you’re a price action trader or a discretionary trader.
3. Ignore opinions and simply follow your plan
If you can do that, I would applaud you. Because you are definitely in the right direction.
Often, traders go onto social media like Twitter or Facebook, etc. to seek the opinions of other traders:
“Hey Rayner, what do you think of this chart? Wow, gold is an uptrend do I buy now?”
“Hey Rayner, what do you think of this XYZ stock now? Can I buy it now? Should I sell it?”
Here’s the thing, If you follow the opinion of someone else, the problem is that you do not know what their trading plan is. Second thing is that you do not know when they will exit the trade because I’m pretty sure they’ll tell you when to buy, but not when to sell.
You don’t want to follow the opinion of other traders because they have different objectives, different timeframes, different goals. This is why you want to follow your trading plan, follow your rules, and ignore the opinion or the analysis of other traders.
If you want to follow a trader, someone to provide you with some knowledge, then follow someone that adopts a similar trading methodology like maybe price action trading or trades similar markets, timeframes, then that’s fair enough.
But if somebody is a day trader and you’re a position trader, it doesn’t make sense. It’ll be a clash.
If you want to be learning from somebody else, then make sure you’re all on the same page and aligned. If not, then ignore opinions and just follow your plan.
4. Proper risk management
Because here’s the thing, you can have the plan, you can have the correct trading system, but if you don’t have proper risk management, then guess what? All of them are pretty much useless.
Every time you put on a trade, you want to make sure that even if that trade turns sour, even if that trade goes against you, even if that trade hits your stop loss, you want to make sure that you don’t lose more than 1% of your trading account.
1% is for those with a medium-size or large-size account. 1% is doable, but for those of you with a small account, like $100 or $50, then 1% may not make sense. But still, I hope you understand the concept that I’m coming from.
Every time you put on a trade, if it goes wrong, you want to make sure that the damage to your account is not too big, like a volcano eruption. You want it to be something small, like a slight pinch so it won’t disrupt your trading.
And the final thing to know whether you’re on the track is this…
5. Trading is boring
Trust me, once you become a consistently profitable trader, once you are up to the next level, you’ll realize that trading is boring because you’re just simply following the rules like a robot there’s nothing much left to think, everything kind of becomes automatic.
Let’s say if you’re a price action trader, you look for the market to be in an uptrend, and retrace to an area of value, then look for a bullish reversal pattern before you buy. And you’ll keep repeating that.
If you’re a systems trader, it gets even more boring, you’ll just scan the markets for specific trading setup, the system tells you to buy or sell, and you’ll just follow that and put your trade into your brokerage platform. And that’s it.
You don’t even need to do any thinking because the system has done the work for you. Once you reach a certain level of trading proficiency, trading gets boring.
Here’s a quick recap…
- Have a trading plan
- Have a trading journal
- Ignore the opinion of other traders and just focus on your plan
- Practice sound risk management and
- Trading starts to get boring
With that said, I wish you good luck and good trading. Until next time.