Building trading confidence

Njabulo NsibandeLatest, Village Trader

jigsaw piecesDuring my Twelve Rules for Successful Trading JSE power hour, someone asked how you can build your trading confidence if you don’t have any confidence to start with. I thought it was a great question as confidence—along with discipline—is the key to unlock successful trading.

The first thing you need to recognise, is that confidence itself is as much a skill as the thing you’re trying to gain confidence in.

Where does confidence come from?

Confidence is a by-product of competence and believing in yourself. In the short term, you can get away with one or the other, but to gain unconditional confidence you need both.

Competence without self-belief can lead to self-sabotage, sending you right back to lacking confidence. And self-belief without competence results in delusional confidence, which is easily shattered. Bull markets tend to foster delusional confidence.

Get the basics right first

To build belief in yourself you first need to work on your competence in trading. Just like a boxer who needs to be fit and know how to throw proper punches before getting into the ring, a trader must first learn discipline and proper trade execution.

Many people make the mistake of trying to jump straight into the ring. Then when they get beat up by the market they think it’s because they don’t have a proper trading system. This takes them down the “holy grail system” rabbit hole, while the answer simply lies in getting the basics right and not in a particular trading system.

Learning discipline and trade execution

To learn trading discipline and trade execution you need to have a beginner’s mind, in other words: Assume you don’t know how to trade. Then find a mechanical trading system, preferably one with a proven track record. The lazy system or 7/21 systems are good examples. The industry guideline of ‘trading a strategy inline with your personality’ doesn’t apply at this stage.

The mechanical trading system needs to decide the following on your behalf:

  • Which markets to trade: Start with just one ticker, for example the S&P 500
  • Which time-frame to trade: Pick one you can actually manage, and use a daily time-frame if you have a day job
  • What triggers a buy or sell and when to buy and sell
  • How much to buy: The system must have a formula to calculate the size of the position you take on a trade.
  • Definition of a perfect trade: Trade checklist

Simply execute what the system is telling you. Aim for at least 20 – 30 perfect trades in a row. And if you make a trading mistake, simply start the count again until you can string 20 perfect trades in a row. I suggest that you use a trading simulator at this stage, as it trains your eyes to see opportunities in the market.

Then graduate to actually placing the trades in the market. But do this in a demo account. Again aim for 20 perfect trades in a row. This stage trains your discipline and patience.

Now use a small amount of money with the same target. It should be small enough that you wont be depressed if you lose all of it. But it should be big enough that it matters to you. During this stage you will learn your emotional and psychological response to winning and losing.

By the end of the exercise you would have executed 60 perfect trades. And by executing a trading plan, you would have climbed the first step to believing in yourself as a trader. More importantly, you’ve learned the discipline to stay with a system.

If the system and time-period you traded happened to be profitable, you would have learned that you can make money trading markets. However, this belief in your ability takes much longer to become part of you in actual trading.

You will also get to know your “trading self” and learn YOUR feel for the market.

Bringing it home

Once you’ve gone through this exercise, if the strategy is inline with your personality, simply continue, adding more money and other tickers to diversify your opportunities. If it’s against your trading personality, use the principles you’ve learned to develop your own rules – which you will now have the discipline to follow. With this competence, you can start building confidence and belief in yourself.

Believing in yourself comes as a consequence of trading well over time. Which brings me to the answer I gave during my webinar: You gain self-belief and confidence through the exercise of trading itself.

Njabulo Kelvin NsibandeTraders share a peculiar characteristic: they’re fiercely competitive, but only with themselves. In practice this means that they see every outcome as an opportunity to learn, and they’re brutally honest about both their failures and successes. This also means that they’re hungry for knowledge. They don’t sleep easy with unanswered questions. And they’re seldom satisfied with just one answer.

Njabulo Nsibande is a founder of Village Trader, and Sakha Ingcebo investment club. His interest in trading began in 2016, alongside a rash of Instagram ‘fx traders’…

Find him on Twitter: @njabulo_goje.