Imagine having a GOOD trade idea.
You know the one.
It may come from a mentor, a FinTwit whiz, or a premium signal group. It may even be the result of hours of analyses.
The signs seem to line up, and you’re confident that you’ve got the discipline needed to pull of your trading plan.
You take the trade and you execute to the best of your abilities.
You lose the trade.
WHAT’S UP WITH THAT?!
Here are common trading rules you may have missed that killed your “good” trade idea:
1. Make pre-trade preparations
Like in any high-performance endeavor, preparation is half the battle in trading. You have to do your homework before you even put in your orders.
- Why does your trade idea make sense today?
- What can change its odds?
- What’s the best case scenario? The worst case scenario?
- Have you reviewed the asset’s previous price action?
- Have you identified the technical levels that may serve as support and resistance?
- Have you listed market themes and data releases that may affect the demand for the asset?
Taking a “good” trade idea without making the necessary pre-trade preparations is like using a regular Poké ball and expecting to catch a high-level, rare Pokémon. You may get lucky, but your chance of success is mostly iffy from the beginning.
2. Never risk more than you can afford to lose
You’ll be surprised how often this “common” trading sense is thrown out the window.In some cases, a strong recommendation from a trading guru or a bad case of FOMO over a volatile asset *cough* Bitcoin *cough* is all it takes to ignore months of discipline in favor of chasing monster profits.
But the rule is there for a reason.
If you risk more than you can afford to lose, then you’re more likely to focus on your profits (or losses) rather than your execution.
Without good execution, your “good” trade idea becomes just another trade idea that could sink your trading account.
3. Get over your previous trades
You’re not giving your “good” trade idea its best chances if you’re still thinking about issues from previous trades.
Let’s say USD/JPY is on an uptrend and that you know you need to scale into it to maximize your profits. Problem is, your last trade was a USD/JPY short that closed at a loss.
Because you’re still thinking of your last trade, you hesitate to add another USD/JPY long even though your trading plan calls for it. Alternatively, you add too much to get a fast “revenge” for your losing trade.
Just like you need to let go of issues from previous relationships to give new ones a chance, you also need to treat each trade idea separately so you can be objective in maximizing your opportunities.
4. Treat trading like a business
One problem with having a really “good” trade idea stuck in your head is that it can overpower your business sense.But you have to remember that ALL trade ideas are part of your business.
Most importantly, you must be MANAGING YOUR CAPITAL at all times during its execution.
Your first job as a trader is to not lose your money. If you treat each trade as a part of your business, then you’ll have better chances of trading long enough to get more of them “good” trade ideas.