In a world where the information available to us is growing at an exponential rate, we must be mindful of the fact that we have a limited capacity to receive, process and incorporate ideas into our own lives and into our trading session.
What you pay attention to can also have an effect on your trading performance as you process this information. Day trading, a tough go at the best of times, can be made more difficult depending on where you put your focus during the trading session.
Focus on the wrong information can lure to making trades outside of your trading strategy
As a principle, it’s wise to reserve your effort for those things that are likely to make the biggest difference to whatever it is that you’re trying to achieve. You want to ignore irrelevant information that can adversely affect your trading performance.
3 Tips To Improve Trading Performance
It’s easy to list out steps a trader should take so they have the potential to increase their level of success. Your system performance doesn’t have to be adversely affected and hopefully these three steps can help prevent that from happening.
Identify, Track, And Put A Cost On Your Trading Errors
There are probably many quotes that you could pull up about knowing your weaknesses, but I challenge you to find a person who genuinely has no idea of their own.
The truth is that it’s our reaction to our weaknesses that’s vitally important.
For example, a trader who misses many of their setups for whatever reason, is likely to know this but can react to the fact in two distinct ways.
- When the trader misses a winning trade, they react on an emotional level. They are annoyed with themselves and might start taking trades they haven’t planned for in order to make up for this. The chances are that these latter types of trade are likely to be less profitable and more stressful at best.
- A trader can understand the error and prepare for it on an intellectual level. Knowing how much a specific type of error tends to cost over a set of trades and understanding when it is more likely to occur, can help to reduce its likelihood of happening again and the psychological impact when it does.
A trader is likely to work on reducing an error if they can highlight the amount of money they have lost/missed out on because of it and are less likely to judge themselves on the outcome of an individual trade where an error has been made. Take a look at Using an Excel Trade Log to get an idea of how easy it is to track your errors and figure out how much they’re costing you.
Stick To Your Stop Loss Levels
Probably one of the biggest problems a trader faces is not sticking to their stops. This isn’t something that happens routinely but on the few days when the problem does start to impact on a trader’s P/L, things can get very ugly.
Don’t think this is something that’s not a problem for really gifted traders either.
There was a guy once I knew, who was an exceptionally good reader of the markets and he’d made millions from trading – then blown it all – then made millions again – and blown it all again. I only knew of this happening twice, but I wouldn’t be surprised if the cycle had continued after we lost touch.
This happened, quite simply, because this trader couldn’t take his stops.
Part of learning to take your stops is about building up confidence and finding a state of emotional balance. This can be achieved in a variety of ways.
- Making sure that your life outside of trading is harmonious means that you’re less likely to lose control of yourself when you’re trading.
- Adhering to your plan and finding some level of consistent profitability, is going to build confidence and mean that you’re more likely to remain loyal to your stops even in highly stressful scenarios.
But before all of this, it’s imperative that you start to change your mindset about stops and the importance of the outcome of single trades.
A stop order or at the very least, the point at which you exit a losing trade, is there to protect your account and your performance over time. If you take much larger than expected losses, the impact can be significant as suggested in Run your winning trades and cut your losers.
Change your beliefs about stops and embrace them.
As one of our Netpicks system owners said once: “You have to stick to your stops so that you are able to stick about long enough to learn how to trade”
Understand The Context Of Where You Are Trading
Unfortunately, your trading system may perform better in certain types of market conditions than others. So if you have a structural framework to work with in order to understand current market conditions and therefore the context of what is currently going on, you’re more likely to be able to identify excellent trading opportunities when your trading signal comes.
For example, if a market has been in a strong uptrend for the last few weeks, what would be the sense in selling it after it’s had a pullback roughly equal to prior pullbacks in the same trend? I call this symmetry in pullbacks and find it to be a valuable trading approach. You can see, literally, when conditions in the market you are trading.
These symmetry measures apply to day trading, swing trading, and any time frame
I you see some kind of top has formed such as a double top or failure test of highs, then the same pullback could have you primed to take a short on the break of the trend.
Understanding the following can not only help you identify great trades, but also avoid poor opportunities.
- what condition the market is in
- where price is relative to what it has recently done
- where the chances are greatest for a large move
We also covered context in our trading tips post about Candlestick Patterns.
Improve Trading Performance – Start Today
There are an infinite number of things that you can change in your trading, but very few that will make a genuine difference to your bottom line.
Take the time to work on these 3 ideas and I’m confident you’ll see positive improvements to your trading performance. Don’t wait until the benefit of hindsight shows you should have been looking at things a little differently.