Only Pro Traders Get These 8 Questions Right

RISK MANAGEMENT
Only Pro Traders Get These 8 Questions Right

Over the years, I’ve coached 400+ traders, been a profitable trader myself, and read countless books on what differentiates a successful trader from a failed trader.

This, combined with my own trading experience, has led me to believe that a trader’s answers to the following questions strongly determine their likelihood of success.

1. I need to know what's going to happen next in order to make money.

   As much as people wish to have you believe they can predict the markets with 99% accuracy, it's simply not true. The markets are entirely unpredictable. So you might wonder, “why bother trading then? If you can’t predict them, isn’t it just gambling?” To use poker as an analogy, the top poker players in the world earn millions of dollars and can statistically beat the average player far over 50% of the time.

This small edge can generate tons of money over time, just as a casino might have a small edge over all the players. Thankfully, markets are highly inefficient in the short term, and patterns can be found to gain small edges. Your job is not to predict what's going to happen next, but to uncover patterns and gain an edge over the market. Create a plan to trade this pattern, and you can be wildly successful.

2. I feel as though losses are unavoidable. 

   Accept losses as a cost of testing to make sure your edge still works. Every 20 or so trades, analyze performance and either move forward if all is going to plan, or step back and re-analyze if it's not.

3. I always define my risk before entering a trade.

   Assuming things go south in a trade, you ALWAYS need to know how you’re going to exit. This means knowing at what price, at what indication, what change, etc. You should also always know how much you’re going to risk on each trade.

For example, if you plan to risk 2% of your account on each trade, calculate how much you need to buy to never lose more than that 2% if your stop-loss gets hit.

4. I often find myself feeling the markets are against me.

   Just as the world doesn’t care about you, neither does the market. It's completely indifferent to you. It's all math and statistics. Stop feeling victimized, focus on the numbers, and follow the plan.

5. I find it difficult to control my emotions when trading.

   The most emotional traders are often those that did the least amount of backtesting. The only way to validate a strategy beforehand is to backtest. Do enough of it, and you’ll be confident in your strategy enough to follow it perfectly and without deviation.

6. I have trouble following my strategy the way I initially outlined it.

   Plan appropriately ahead of time, backtest, demo trade, then go live. This process will help in adhering to your strategy.

7. I often feel compelled to take a trade for the fear of missing out.

   If it doesn’t follow the plan, just don’t do it. This isn’t rocket science. For scalpers, a good idea is to limit your daily trades. For example, if you’re only allowed to take 3 good trades per day, you’re less likely to waste them and FOMO into a trade.

8. I have trouble pulling the trigger and taking trades.

   This also relates to a lack of preparation. Using the analogy of a boxing match: if you had no boxing training, you wouldn't feel confident stepping into the ring. But if you had 12 months of training and beat most people at your gym, you’d probably feel more confident.

Confidence isn’t a natural talent, it's an acquired skill based on how we actually perceive ourselves. If you’ve done a ton of backtesting, been successful in demo trading, and you’re risking a small, reasonable amount of money that you’re okay with losing, there should be no reason to feel anxious about taking a trade. If you feel anxious, it's probably for a good reason, and you need to assess that.

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