When you don't have confidence in your trading system, it is the worst feeling in the world. It seems like you have no purpose and you question your worth as a trader.
Maybe even as a person.
Every single trade looks like it will lose money and you may even contemplate jumping back on the Trading Silodrome again. Even normal drawdowns affect you deeply and you second guess every trade setup that appears on your screen.
So what is the solution?
The best solution will be different for everyone, but here are three simple ways that you can use to start building confidence in your trading method. It doesn't matter if you learned it from a course or from a mentor or if you developed it yourself.
As Walter Peters says in his book, you want your trading to become boring. You know that you will win some and lose some, but on balance, you will come out ahead.
If that is the kind of confidence that you want to have in your trading method, then keep reading.
1. Backtest It
Not every trading method can be backested. Strategies that rely heavily on fundamental factors or trader intuition usually cannot be accurately backtested. But trading methods that primarily use technical entries and exits can be backtested.
Using historical data to see how well your trading method performed in the past is a great way to build confidence in your trading method. If you know what to expect from your trading strategy, you will be better equipped to handle drawdowns.
The downside is that since you do not have real money on the line, you will be missing the psychological stress element of trading. But that can also be a good thing.
When you examine a trading method without any emotion, you can get a clearer picture of its real trading results. That in itself can give you confidence that the strategy is sound. Then it is up to you to execute the strategy as well as you can.
So if you want to start backtesting, you can click here to read the tutorial.
2. Demo Trade It
Another thing that you can do is trade your method in a demo account. This will help you build your confidence in taking and managing real-time trades.
As you probably know, almost all Forex brokers offer demo accounts. But not all demo accounts are created equal.
When choosing a broker to demo trade with, consider the following factors:
- How long do they allow you to keep your demo account open? Having to sign up for a new account every 30 days can be a hassle and can cause you to lose momentum.
- Do they allow you to adjust the size of your demo account to make it more realistic to what you will be trading? It might be fun to trade a $3,000,000 account, but it doesn't help if you will be trading a $5,000 account with real money. Try to make your demo conditions as similar to your real conditions as possible.
- Demo trade with a broker that you will probably open a real account with. This will allow you to learn the little tricks of their platform and give you even more confidence.
- Do they offer smaller lot sizes? Over trading is a common cause of large trading losses, which in turn cause more trading losses. Make sure that you are trading lot sizes that allow you to take the correct amount of risk on every trade (usually 2% or less).
When taking the factors above into account, really like using Oanda for demo trading. They allow you to keep your account open forever and they make it really easy to adjust your account size and lot sizes.
But only trading play money can start to seem a little pointless. So once you have worked out all the kinks in your trading method and you understand how to use your broker's platform, you can move on to live trading.
3. Trade It In A Small Live Account
After you have successfully tested your method with fake money by backtesting and demo trading it, you are now ready to put some real money behind it. But don't make the mistake that most people make by putting a ton of money in your trading account in the beginning.
Having too much money on the line when you are first starting out will put undue pressure on you and give you even less confidence to take trades. It's funny how our perception of what is a lot of money can affect our trading decisions.
I call it the Theory of Dollartivity.
The Theory Explained
For example, if you are used to making $75,000 per year at your job, then losing $1,000 is probably a lot to you. But if you are trading a $100,000 account, then $1,000 is only 1% of your account and you are using proper risk management.
If you are not used to losing $1,000 on a trade, then it could really affect you psychologically. This could lead to a loss of confidence and poor trading.
However, if you start out with a $100 account and start risking $1 per trade, that is a lot easier to stomach. You can start trading your method and gain confidence in how it works and what you can expect. Then you can gradually add more money to your account as you become more comfortable (and profitable).
This is why I feel that trading nano lots in the beginning is so helpful in the development of any trader. You will be surprised how real trading becomes when you have even just $1 on the line.
Final Thoughts on How to Develop Confidence in Trading
So those are three ways that you can use to gain more confidence in your trading method. Don't let their simplicity fool you. By applying these methods, you can start to feel like you are making some real progress.
They have helped me and countless other traders. So get started right now.
Drop everything and figure out how to develop confidence in trading Forex by implementing one of these tips right now.
