Trading Psyche – Confidence

In this installment exploring the Psychological Edge of trading, I want to briefly discuss the role of Doubt, or said in a negative light – Doubt. In some ways, Doubt is a predecessor to Fear. It seems to touch all of us, and in time will grow into a level of Fear that will cause us to behave differently.

As a retail trader - a working stiff just trying to invest his money wisely - it's VERY easy to think that the Wallstreet guys are smarter than I am. After all, they're making the big money, living in the big city and cruising around in their yachts on the weekend. But the truth is they're not. If you doubt that, just check out the results of most hedge fund and money managers for 2008. The vast majority got completely trashed in that difficult year.

The only reason I bring this up is that the slightest wrinkle in my performance will sometimes cause me to doubt my ability to return a consistent profit. The irony of this is that a little inconsistency in performance may cause me to change my trading approach. In other words, one inconsistency leads to another and the vicious downward spiral begins.

What to do: I hate to harp on this subject yet again... well... but here I go. In my view, it's crucial to have a trading plan with a very clear and actionable set of rules. It must have a quantifiable edge. I know that this series of posts is about our psychological edge, but one edge improves when the other improves. Without confidence in our system and approach we will spend way too much time second guessing ourselves, rather than just trading the plan.

Your psychological edge needs a foundation on which to rest that cannot be shaken. Whenever I doubt myself I always go back to the foundation - the plan. I do the math. I review the edge, I evaluate the execution. Did the plan fail me or did I fail the plan? If things aren't working it's usually the latter.

Without the solid foundation of a sound trading plan you have no guidelines when Fear and Doubt come into play. In other words, if I'm going to be Confident, I need something to be Confident about.

Doubt also leads to confusion. It keeps us questioning our approach and constantly looking for the next great trading system. Commit to a philosophy and proven trading plan and stick with. Only by doing this will you master the approach and build the confidence that leads to what I call GrinVesting.

Good Trading…