Before Roger Bannister ran the first sub four-minute mile on 6 May 1954, nobody thought it was possible. Yet just two months later, two more athletes ran the mile in less than four minutes. Since then, 1,400 athletes have achieved this feat.
So what does this have to do with trading? The answer is that a lot of it comes down to psychology. Before Bannister ran his sub four-minute mile, very few people thought it possible, but once he’d done it, people knew it was achievable. Bannister gave other athletes what psychologists call ‘social proof’, where people know they can copy the actions of someone else in order to achieve a similar outcome.
When you start learning to trade, most traders will hope to find a strategy that suits their lifestyle. Following a trading strategy means you’re more likely to get the outcomes you want from the market.
There is a risk that after placing a few profitable trades, you get the feeling that “this really works”. However, there is always a possibility that you are then hit by some losses. A few losses can be expected, but if the losses start to mount, this can create doubt in a trader’s own ability and strategy.
This may cause someone to start trading erratically, for example cutting profits short, only to see the trade continue to move in the same direction seconds after closing out of it. Or worse, hanging on to losing trades because you don’t want to be wrong again.
Here’s an example of the trading learning curve.
The trading learning curve
Successful traders will probably recommend maintaining a consistent approach to the market. This means you have to believe in your strategy. When new traders start doubting their strategies, they start disobeying their own formula, which inevitably then has a negative impact on the outcome.
As a new trader, how do you develop a strong belief in your strategy?
First, finding a trading mentor can be useful, someone who can explain trading strategies to you – the theory, application and results. It’s important to learn the small tweaks and nuances that make the difference between two similar set-ups, and why one is more attractive than the other.
Second – and this is crucial for a beginner - you should learn how to backtest your strategy. This is when you take the specific criteria that make up your strategy and look for setups that happened in the past. Key information for this process would include:
Backtesting should give you increasing confidence that your strategy works and by applying it correctly, you can help try to get the probabilities going in the right direction for you.
New traders are sometimes susceptible to changing their behaviour when the market is going their way, believing that they are having a ‘lucky streak’. This is likely to affect the way they approach their next trade.
To overcome this problem you can follow the successful traders’ mantra. This runs as follows: “never let the outcome of a past trade influence the way you see the next trade.”
Whether the last trade was a win or a loss, you must never let that make you more positive or negative about the next trade. You have to assess every trade on its specific merits and keep your emotions out of your decision-making.
A key aspect of trading – especially in the early days – comes down to creating certainty around the approach you’re taking and developing a belief in your own abilities.
Consistent trading success doesn’t come in a day, a week, a month or a year. It comes over many years and has more to do with how you trade as an individual rather than the markets themselves. You need to develop belief in your abilities and your strategy, and follow the rules you’ve established for that strategy.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
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