Know Yourself Before You Trade

Before trading options, most traders make the mistake of primarily focusing on improving their technical skills. However, I propose that there is another skill that is more crucial.

Once you’ve acquired the technical skills you believe are necessary, you may still encounter frustration with some of your trades. Whether it’s regret for not cutting losses earlier or selling a stock prematurely, these frustrating moments hinge on two key elements that shape you as a trader: your mental aptitude and emotional awareness. It’s imperative to get to know yourself before delving into trading, especially options trading.

Let's find out how well you know yourself.  

Question 1: When faced with a trading opportunity, like a fast-moving stock, how quickly do you consider it?

There are quick decision makers and there are slow ones. Regardless of the type you are, the speed at which you decide should not be due to impulsivity or over-analysis. The former results in suboptimal decisions, whilst the latter, in indecision. Akin to the ER of a hospital, in a rapid trading environment it is vital to not only make quick decisions, but also quality ones.

This ability stems from acquiring knowledge and applying it in high-pressure training situations. It’s about training your instinct before pressure arrives. Understanding yourself and your biases helps in making sound decisions during critical moments.  A well-trained instinct is a trader’s edge.

Trading Tip 1: Train for quality, snap decision making.

Question 2: When faced with a trading decision, how do you usually feel? Confident or unsure of yourself?

It's easier to doubt oneself than to have self-belief. This tendency often leads some traders to follow crowded trades, adopting a herd mentality. Relying on others’ decisions is not a viable strategy. Choose to be a contrarian: back yourself and trust your judgement.

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

Question 3: When considering a new trade, do you tend to recall past losses or wins, especially in the same stock or positions?

'Living in the present’ is a widely embraced mindset, especially relevant in the context of trading. Trading is about the here and now, your past decisions are irrelevant. The trade that you see directly in front of you is what matters. Let your trade decision be unencumbered, unclouded and fresh each time.

Trading 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, do you consider your emotions in your decision-making?

While we shouldn’t let emotions completely dictate trading decisions, ignoring them is equally unwise. Being aware of your emotions, and how you are feeling at that moment, will enhance your abilities as a trader. The most common emotions that cloud traders’ judgement are fear and impulsivity. Even stepping away for a moment, like for a cup of coffee, during emotional moments can be invaluable for making quality decisions. Strike a balance; just as you shouldn’t let your fear of losses or memory of those red numbers cloud your judgement, neither should your eyes be solely on the prize.

Trading Tip 4: Be in tune with your emotions so they work with you.

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 wiser, more optimal trading decisions.