Trading With Confidence: How You Can Develop More Confidence In Your Trades

Confidence is contagious. So is lack of confidence.
~Vince Lombardi

Have you ever opened a magazine and seen a full-page ad of some luminary sporting a "milk mustache"? I like the question, too. "Got Milk?" Everyone from Wentworth Miller to Jessica Alba has appeared on a print or TV ad with the milk mustache and the famous tag line. The ads insinuate that the success of these stars is attributed to drinking the nutritious liquid.

So, if we lined up the finest traders and had to put a tag line under their picture, what would it be? There is one characteristic that distinguishes the "haves" from the "have-nots" - a quality that's decidedly different for a top trader when he's at the height of his game versus when he's struggling (all traders have times of struggle)… What would the tag line be? Got Confidence?

Does trading success develop confidence, or is it the other way around? It's a fair question, but probably not the "right" one. A better question would be, "Have you ever seen a consistently profitable trader who lacked confidence?" Or, "When you have had a string of trading excellence, did you feel more or less confident than usual?" Here's why trading with confidence is crucial to your trading success, and how you can get it by focusing on three key elements…

Forming A Foundation For Confident Trading
As applied to the world of trading, let's call confidence the ability to act without reservation. Confidence is developed when key underlying characteristics have been put into place. One needs to have his trading psychology in place, a strategy or system that is proven, and execution proficiency.
When these three elements come together, they form a foundation upon which a trader can act with great confidence. Let's look at each of them, and see what steps you can take to help put them in place…

Confidence In Your Personal Trading Psychology
We'll start with the most important item - your personal trading psychology. To have confidence when you trade, you will need to develop a keen sense of who you are and how you will react to both common and extraordinary trading situations.
For example, how will you feel after losing six trades in a row? How will this affect your performance on trade seven of this string? What will be your plan to develop the patience, discipline and other attributes needed to provide consistent performance while trading? If you are not completely satisfied with your psychological state of readiness, your confidence as a trader will constantly be in doubt.

Confidence That Your Trading Strategy Works
The second area that you need to develop is your trading system or strategy. While this is an area that traders spend most of their time on, I find that they spend very little time developing confidence that the strategy works. This takes time and patience.

Can you state succinctly why your system works? Do you know what types of market conditions are best for your system's performance? In what types of markets does it perform poorly? What kind of losing streaks can you expect every month or quarter with your strategy? What size drawdowns will these loosing streaks produce? Too often, people buy a strategy or quickly develop one over a weekend and then start trading it without getting to know why, how and when the system works. So be prepared to spend the time required to really know the "nuts and bolts" of your trading strategy.

Confidence In Your Own Definitive Trading Plan
Once you have developed your trading psychology, and taken care to build a strategy that you know works, you need to be able to execute it consistently. There is a psychological element to this part of your trading (many traders have trouble "pulling the trigger"), but there are also some key logistics that you need to take care of in order to trade with confidence.

If you are worried that your trading software won't work or that you don't understand it, or if you're concerned that power outages and Internet issues will keep you from executing your exits, or if you think that the market makers and specialists are "out to get you," then you are definitely going to have trouble trading with confidence. The tool that can help you overcome these concerns is a well-defined trading plan that includes a "disaster plan" and a good understanding of how your trades are executed.

Confidence is not an end in itself, but it is a desired result of having a comprehensive trading process that works. If you struggle with achieving a state of confident trading, I suggest that you dissect the three areas that we talked about in this post. If you find one or more areas that need upgrades, then put together a plan to increase your mastery in that area - a psychology investment plan or a system upgrade plan, etc. Look toward improving your confidence to improve your trading.