Monday, August 30, 2021

Two Hallmarks Of Quality Trading

I recently wrote an important article on the topic of how the ways in which we trade impact our psychology.  We commonly assume that working on our heads will improve our trading.  Less often do we recognize that the best way to maintain a positive trading psychology is to trade well.

What does it mean to trade well?  Here are two key hallmarks of quality trading:

1)  Quality trading is planned, not reactive - Planned trading means that we begin with an idea that we have researched and then identify good risk/reward points for participating in the idea and proper sizing for the trades, so that we can easily survive being wrong.  Planning means that we clearly identify what needs to happen for us to exit and/or modify our positions.  When we overtrade or take positions out of a fear of missing moves, those trades are reactive.  In reactive trading, we make decisions for psycho-logical reasons, not logical ones.

2)  Quality trading is open-minded, not biased - Sometimes we see traders who trade with a fixed idea and/or a persistent directional bias.  They look for evidence to support their views and discount evidence that might lead them to question their positions (confirmation bias).  Open-minded trading  means that we can express ideas in multiple ways and that we can trade multiple, independent ideas.  We are not wedded to one side of the market or one trade idea.

A very simple way to evaluate our trading is to rate each trade on the two criteria above and sum up those ratings.  If we're developing as traders, we will become more planned and more open-minded in what we do.  We will develop processes that keep us planned and open-minded.  The goal is to trade well, not to simply make money.  If we trade well, we inevitably maintain a focused mindset and place ourselves in the best possible position to succeed.

Further Reading: