As posted earlier, to achieve higher rewards (profit), you must take on more risk (uncertainty).
But how do you know how to analyze your risk-taking behavior? In short, it comes from taking risk and writing down your responses – physical (sweating, increased heart rate, shaking, etc) and emotional (doubts, fear, negative thinking, anger, etc). You must collect data to analyze it, yet so many people do not take this step, even though they know they should. How many of you keep a trading journal? How many include a component that includes recording emotional reactivity? Now how many of you don’t keep a journal at all?
When you analyze your risk-taking behavior, consider the following:
- Your propensity to set a concrete target (price or behavioral) and then take risk incrementally to achieve this goal
- Your trading strategy and how it relates to your natural personality (conservative? aggressive? passive?)
- Whether or not you are getting the results you envisioned and whether you are taking steps to correct your course
- The kinds of chart patterns (or indicators) that naturally attract your attention and what edge these patterns have over time
- Your internal confidence in yourself, your system (which is larger than pattern recognition), and your abilities to achieve your clear targets
- Barriers (internal) to achieving the goals you envision and how to overcome them
A wonderful way to analyze your trading performance is to write down and analyze a few key trade set-ups that you can recognize easily and quickly (as they develop in real time), and try to identify where these patterns happen in the chart cycle. Identify the highest high and lowest low on a chart and identify where your trade fits in the cycle.
- Does your chosen pattern(s) occur at the beginning, middle, or end of a longer-term move?
- What implications can you imply from this?
- Are you trying to call the top and the bottom through your pattern?
- Is the pattern most likely to occur at the bottom, middle, top, or does it occur at all stages?
- Is there a particular phase of the chart where you personally feel most comfortable taking your trade when you see your pattern?
Obviously, if you are scalping or day-trading, “longer term charts” will be relative (meaning 15 minute charts or daily charts) to your chosen time frame.
Seek the larger picture of your pattern, and once you discover this, use this information to try to place the next trade you take (with this pattern) in the context. When you understand where your pattern occurs in a normal cycle, you can take on more risk because of increased confidence in your pattern – what is left is increased confidence in yourself to TRADE that pattern when you recognize it in real time market action.
It is still important to analyze your patterns, your ability to recognize “your” patterns, psychological responses to identifying these patterns, and barriers that prevent you from entering trades based on these patterns. Questions that help identify your own personal risk-taking behaviors highlight your willingness to take on increased risk, and increased confidence in your identified patterns and your ability to trade these patterns will likely increase your profitability.