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Confidence is the backbone of all successful trades. It is perhaps one of the most important
qualities of successful traders because of how challenging the market can be. Confidence fuels
your drive and helps you to overcome obstacles. When you trade with confidence, you are not
easily swayed by speculators and can make informed trading decisions.
It is not easy to trade with confidence especially when you haven’t had a lot of success in the
market. But it is a trait that can easily be developed using these methods.
5 Sure-Fire Ways to Make Informed Trading Decisions
Here are some pointers to build your confidence in trading and your ability to make informed trading decisions:
1. Know your trading style
What makes trading so popular is that traders can adopt a variety of strategies and analytical methods that suit their preferences. This is why no two traders have the same trading style. In the beginning, novice traders may decide to copy the trading style of more successful traders using methods like copy trading or mirror trading. But for long-term success, you will have to develop a style that is more tailored to your needs and personality. Developing a trading style shores up your strengths. It also increases your ability to specialize and gain valuable experience to maximize the returns of your trades while reducing risk. Above all, it fits in with your personality and lifestyle thereby affecting how you make trading decisions.
Types of Trading Styles
There are four main types of trading styles to choose from:
- Scalping: Scalping is a rapid style of trading and trades are often made within seconds of each other. It is best suited for traders who are fine with making quick decisions with little to no hesitation. The fast pace of scalping is also suitable for traders who can work under pressure because you will need to focus on charts consistently to make profits.
- Day trading: For those who are not comfortable with the pressure of scalping but don’t want to hold positions overnight, day trading is the answer. It requires traders to enter and exit positions on the same day, removing the risks of overnight positions. With this trading style, traders have enough time to analyze the markets before making trades.
- Swing trading: Unlike day traders, swing traders hold positions for days or even weeks. This is popular among traders who want to trade part-time because of other commitments. However, you’ll still need to spend hours analyzing the market with strategies like trend trading and breakout trading.
- Position trading: Position traders are long-term traders waiting for maximum profits from major price shifts. As a result, they can hold positions for weeks, months, and even years. Position traders are typically patient and not concerned about pullbacks and minor price fluctuations. They also use a combination of weekly and monthly charts combined with fundamental analysis and technical indicators to make trading decisions.
2. Get Access to Relevant Trading Information
When trading, it is important for traders to have access to a wealth of information because trading cannot happen without it. But not all information is necessary or relevant. Some are mere speculation or market noise that will only overwhelm you and stop you from seeing what is really important.
As such, it is necessary to filter the information coming to you and pick the best information sources. One way to determine what information is needed when you trade is by having a trading plan.
A well-defined trading plan articulates the rules you will follow and by extension, streamlines what is important based on predetermined rules. It also allows you to analyze information in an objective manner and make decisions in line with the methods or strategies outlined in your trading plan.
Although it is not very utilized in trading, using Level 2 market data is another way of getting comprehensive trading information. So, what is level 2 trading?
It is an order book that gives traders detailed information about a particular asset. It is a necessary tool for traders because it provides information specific to a trading asset. Level 2 data also gives behind-the-scenes insight into the actions of big financial institutions and traders. In addition, it makes it easier to understand the market sentiment, and correctly predict the direction of the market.
With this information at your disposal, you can decide the best entry and exit points, take profit targets, and stop-loss tools to maximize your trades.
3. Focus more on the process
There is never a 100% guarantee that your trade is going to be a good one because of the unpredictability of the market. Therefore being solely focused on your profits rather than the techniques or methods that take you there, can frustrate you. This in turn will affect your trading confidence and by extension your ability to make informed decisions.
When you focus more on the process, it not only gives you profits in the long run but builds your confidence as well. It allows you to maintain a consistent and disciplined approach to trading avoiding costly mistakes as you become an experienced trader.
However, achieving this takes time, patience and deliberate practice because it is hard not to focus fully on making profits without making a few changes.
How to focus on the process
Your tools or skills alone aren’t enough to make you profitable. It can help with short-term success and decision making but it can only hold up for so long if you want a long-term career in the market.
Take time to learn how to trade properly, and understand the market, forex trading techniques and setups. Learn how to properly manage risks with stop loss and proper position sizing in order to keep improving your experience in the market.
In addition, maintain a comprehensive trading checklist. A trading checklist will help maintain objectivity and focus on process-oriented goals. It will also enable you to make trades that suit your trading plan and risk level and inform your decision-making.
4. Avoid overconfidence when trading
Overconfidence can make traders overrate their abilities and become unreasonably confident in their expectations and trading decisions. It is the reason why most traders fail and can affect both experienced and new traders.
While confidence in trading is crucial in decision-making, overconfidence causes traders to underrate the market. This can lead traders to take risky decisions like aggressive market timing, executing inflexible strategies, overtrading, trading big positions, and ignoring volatility in the markets.
In addition, it can create an illusion to traders that they have control over the market. But it can be dangerous when you fail to properly access the risks and take steps to manage them. This is why overconfident traders are less likely to test out their strategies because of the innate belief that it is going to work.
Since their ego stops them from looking for new techniques or building their skills, overconfident traders could end up relying on outdated techniques.
How to avoid overconfidence in trading
Overconfidence can lead to difficulty while trading. But luckily, there are a few steps you can use to manage it:
- Stay Humble: Most times, after a trader had experienced an extensive winning streak, and believes that they have perfected their strategies. It could also happen when traders believe they are better than average and ignore the process of becoming successful traders. So, remember that you are not perfect. No trader is. You may experience remarkable success with your strategy, but things keep changing and you must be open enough to change with it.
- Journal your trades: Use a journal to record every aspect of your trades: entry, exit, risk management tools, losses, profits, and more. This helps you to have a more realistic view of the market when you notice how the market changes with each trade and increase your chances of being a successful trader. Plus, it is a good way to maintain accountability and be honest with yourself about your ability and skills.
- Listen to alternative perspectives: You can join trading forums and groups to listen to other perspectives about the market. It is also advisable to watch videos or read blog posts from traders who you respect and see how they do things.
Even if you don’t end up adopting parts of their techniques or belief about the market, it still makes you aware that there are different ways of doing things.
5. Make Calculated Efforts
Making informed trading decisions requires you to approach every trade with care and take calculated steps toward achieving your goals. To achieve this, always backtest your strategies to see what parts of them work and what don’t. Also, keep a record of your predictions and analysis of the market and measure it against the results of your trades. This will help you to tweak your actions and provide more practical information to work with.
Being intentional and conscious of the steps you take before trading, increases your chances of success. It also mutes out market noise and speculation because you are confident in your decision. Making calculated efforts helps to cut down impulsive and risky actions which could negatively affect your portfolio.
For traders, making informed decisions can be a challenging task but it can be done with research and confidence in your ability. Always keep in touch with the current happenings in your market and keep updating your arsenal with indicators that will make your decision-making easier.
When your trading confidence takes a hit, take a step back to examine the situation. Review trades that were unsuccessful and take time to identify the problems with such trades. When the issues have been identified, take a prudent approach toward the market until your confidence is restored.