Trading is far more of a mental game than anything else. The best practical tactic or technical indicators in the world are completely worthless without the right mental approach to trading. It all starts right before you place a trade.
Being mindful will help you make better trades and clear your mind so you can stay mentally sharp in this very difficult game. Luckily, I’ve got three simple questions to ask yourself to help you get into the right mindset when making a trade.
Why am I making this trade?
There are so many strategies when it comes to trading. Things like market fundamentals and price action is enough to make you feel overwhelmed. Whatever tools you use, make sure you stick with them and only make trades that make sense based on your strategy.
For example, if you look to trade moving average crossovers, are the averages crossing? If you’re looking to trade options during periods of high implied volatility, is IV at a level that make sense?
Whatever the case may be, always make sure to only place trades based on objective information. Never simply trade to trade or make them based on gut feelings or opinions.
What am I willing to risk on this trade?
Risk management is, without question, the most important part of trading. Before placing a trade, you should always decide how much you are willing to risk on the trade. Knowing the risk upfront can help you maintain objectivity during the trade, especially if it initially moves against you. Never place a trade with no consideration about the risk beforehand.
How will I manage the trade?
If the trade moves in your favor, think about how the trade will be managed. There are numerous schools of thought on this subject, and none are necessarily right or wrong.
For example, some traders like to set a profit target upon trade initiation. Others will look to trail stops to try to capture larger potential moves or trends. There is also the issue of adding to a winning position.This is largely a matter of personal preference, but it is critical to consider how you may manage a winner beforehand.
Although these three questions may seem ridiculously simple, there are a surprising number of traders who don’t even consider them. It makes sense then that many traders have a tendency to exit winning trades right before they turn profitable or they let losses get out of control, crippling their accounts in the process.
Use these questions with a trading to help you get into the right frame of mind when trading. Over time, this practice can help you maintain the right mental frame of mind to deal with the ups and downs of trading, and may potentially have a significant impact on your overall profitability.
