Know Yourself Before You Trade

Before trading options, most traders make the mistake of only preparing their technical skills, but I argue that there is something much more important than this. After you have acquired those technical skills that you think you'd need, you will still feel frustrated with your trades. You will be frustrated at yourself for not cutting losses earlier or making a bad judgement on a stock. In these frustrated moments of trading, there are two elements which will make the biggest difference: Mental aptitude and emotional awareness. To get to know yourself better before you start trading, particularly trading options, here are some questions you can ask yourself.

Question 1: When faced with a trading opportunity, like a moving stock, how quickly should I consider it?

There will be the quick decision makers and the slow ones, but the speed in which you decide should not be due to either impulsivity or over analysis. One results in suboptimal results, whilst the other indecision. In a quick pace environment just like in the ER of a hospital, you need the skill of making good quality decisions in a snap. This comes from knowledge and then training yourself under the environment. Knowing your own biases and then adjusting for it by dialling up or down at the critical moment. A trained instinct is a trader’s edge.

• Tip 1: Train for quality snap decision making.

Question 2: When you are about to trade how do you usually feel? Confident in your decision or unsure of yourself?

Don’t be affected by herd mentality, and remain confident in the trade you believe you should make. Where some will brazenly spout the phrase “buy when everyone else is fearful and short when everyone is bullish”, looking to others’ decisions to decide your own is not a strategy, and you shouldn’t react to unpredictable short-term market movement. When plagued with these types of doubts, your trades will be the hardest to pull. It's much easier to doubt yourself than to have self belief. Practice backing yourself in your trading, because if you don’t start then you can’t be proven wrong.

• Tip 2: Back yourself to win. Self doubt is traders' biggest enemy.

Question 3:

When faced with the opening of a new trade, do you think about past losses or wins?

The trade at present and how you decide to act on it is what you should focus on, not past losses or past glories. The way you behaved to a similar trade in the past has no relevance here, and don’t let it cloud your current decision. Each situation is different, and hence your judgement should be fresh and unencumbered each time. 

• Tip 3: Be focused and present. Forget about your past losses and your past glories too.

Question 4:

When faced with a potential trade, how much, if at all, should I consider my emotions in my decision-making? 

Whilst we shouldn’t let our emotions take complete control over our trading decisions, we also shouldn’t completely ignore them. Being aware of your emotions both in the moment and retrospectively will make you a better trader. Just as you shouldn’t let your fear of or memory of losses cloud your judgement, neither should your eyes be solely on the prize. 

• Tip 4: Be in tune with your emotions so that you can work with them.

Certain personal traits, emotions and behaviours can get in the way of your trading and affect your performance. Therefore, it is imperative to be aware of and start tackling the cognitive and emotional element of trading. You are wholly unique as a person, so why would you as a trader be any different? Trading is as much about knowing yourself as it is about the techniques, and once you understand yourself as a trader, you can begin making smarter, more informed trading decisions.