How to Trust Your Setup

11/04/2008 12:01 am EST

Focus: STRATEGIES

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

One of the great ironies in life is that as traders we often trust ourselves least of all. Most traders (myself included) approach the whole enterprise with a deadly combination of overweening sense of arrogance in our ability and underwhelming sense of confidence in our trade setups. When it comes to trading, no one can second guess or sabotage us better than ourselves.

All it takes is one or two stop outs in a row and suddenly the setup that we worked on for months goes out the window. Impulsive trading takes over as we "try to get it back from the market" and the account soon plunges into a deep drawdown.

The most maddening thing about trading is that even if you are doing everything right, you will be wrong continuously. In no other profession (except perhaps meteorology) does such a high rate of failure seem acceptable. Take dentistry. Once you know how to fill a cavity, you can repeat the process hundreds, thousands of times without ever making an error. In trading, especially in rapid day trading you will likely make an error at least once or twice each day.

So how we learn to trust our setups? Practice, practice, practice. Trading is contact sport and can only be mastered through endless repetition. One of the biggest mistakes that many traders make is to learn on a demo account. Demo trading, in my opinion, is less than useless. It creates a false sense of control and an overblown sense of importance, especially if you trade with "millions' of demo dollars. Demo trading is good for only one thing—getting to know the trading software. Once that's done, you need to trade with real money. Why? Because you can never replicate the psychological pressures of real trading unless you have skin in the game.

The great benefit of many retail FX trading platforms is that you can configure your size down to a ten-cent pip so you can still trade with real money but not have to pay much for your education. The more you trade your setup, the more you will learn its intricacies under real market conditions, and the more patient you will become. The more you will start to trust your setup and the more you will start to trust yourself.

By Boris Schlossberg of GFT Forex

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