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4 ways to make better decisions in trading

Daksh Murkute | | |

I read a very intriguing thing the other day, it said that our life goes from birth to death, and in between, it’s our choices or the decisions we make, that shape how our lives turn out.

 

Now, we are going to be making decisions for literally everything in our lives, and trading is no exception. So, wouldn’t it be great if we could just make good decisions most of the time?

 

In this blog post, I’m going to go deep into decision making and I’ll tell you exactly why you need to be making good decisions in trading and how it can affect your performance and your overall journey.

 

I will also give you 4 key tips that will drastically improve your decision making skills and you can take your trading to the next level. So stick around till the end.

Contents

 

 

Why is good decision making important in trading?

 

Why is good decision making important in trading?

 

In this part of the blog post, I want to make you appreciate good decision making skills in trading and then only will I move ahead.

 

So tell me, what are the decisions that traders make? Whether to take a trade or not, where to enter, where to exit, how much to risk, how much position size should they trade with, and so on.

 

These are some of the common decisions that traders need to make and these decisions are going to directly and massively influence their performance.

 

Now, if these decisions have so much importance, so, wouldn’t it be obvious that these decisions need to be perfect? Or even if not perfect, at least it should be good right?

 

This is exactly why you need to have good decision making skills if you are a trader. You are going to make decisions almost all the time in this business.

 

If you look at any successful trader, or rather any successful person, you’ll see that it was the right decisions they made, at the right time that allowed them to taste all the success.

 

A question should now come to your mind, how to make good decisions or how to improve decision making skills? We’ll get to that right away.

 

 

How to make better decisions in trading?

So look, there are many things that you can do to improve your decision making skills but, I’m now going to give 4 powerful tips, that I myself follow, and it allows me to take optimal decisions.

 

1. Change the way you approach decision making

I’m sure that most of you, when put in a situation where you need to make a decision, would start thinking about all the right decisions that you need to make to achieve whatever goal you’re looking to achieve.

 

But, instead of doing this, what if we changed the process, and try to figure out, what are the decisions that you shouldn’t be making at all?

 

To simplify what I just said, whenever you are in a position where you have to make a decision, instead of finding reasons as to why you need to make a decision, find reasons for why you shouldn’t make a particular decision.

 

I’ll explain this with an example. Look at this chart below.

 

How to make better decisions in trading?

 

As you can see, there’s a clear resistance and support level formed, and the price has now reached the resistance. What decision would you take, considering that you only looked at the chart just when the price reached the resistance zone?

 

If you’re a reversal trader, then you would say that a shooting star is formed and that you’ll go short.

 

But instead of doing that, you should think, the price is showing weakness by having long wicks, and that’s why you won’t go short now and you’ll wait for more confirmation.

 

If you would have taken trade based on the first decision, it would’ve been a losing trade maybe.

 

But if you waited for confirmation, and you even got that with that big red candlestick, the trade would’ve been a big winner.

 

This is exactly why you should consider looking at decision making from another angle and it might lead you to positive outcomes.

 

 

2. Think beyond instant gratification

Say that you see a trade opportunity in front of you and you have to make a decision whether to take the trade or not. What goes on in your mind at that moment?

 

I’m sure that for most of the people, all that they would be thinking about is the profit that they can make if the trade goes in their favor.

 

But, is that an optimal decision making process? Not at all. This is why you should think beyond instant gratification. I’ll explain it with an example.

 

Say that you have a burger in front of you and you are deciding whether to eat it or not. You might eat it thinking that it will fulfill your hunger and satisfy your taste buds.

 

But, did you think about what will happen afterward? Is the burger healthy for you? Is it giving you proper nutrition?

 

This is what instant gratification is. It is what you would gain right after you do something. This is also known as first order consequence.

 

How to make better decisions in trading?

 

Now, what you should be doing instead, you should think beyond the instant gratification, or think about the second order of consequence.

 

For example, if you see a trade opportunity in front of you, instead of thinking about the profit or loss you may stand to make from the trade, think about your trade plan and whether this trade would fit in it or not. Think about whether this trade is a high probability trade or not.

 

Once you start seeing trading from this perspective, you are only going to improve the decisions that you make and it will lead to better results.

 

 

3. Harness the power of checklists

Say that you are going grocery shopping and you need to buy lots of things, what do you do? You might make a checklist and tick things off as you put them in your shopping basket.

 

Now, do checklists only help in making you remember what to do and that you don’t forget it? Not really, there is one more advantage of having a checklist.

 

I had read a book by Atul Gawande titled “The Checklist Manifesto”, and in that book, Atul talks about checklists and how it is so important.

 

So checklists can actually lead you to make better decisions and I’ll explain how exactly it does.

 

Say that this is a trader’s checklist:

  1. Is the price in my area of interest?
  2. Is the market structure favorable to me?
  3. Can I see where exactly to place the stop loss?
  4. Can I see where exactly I will exit the trade in profit?
  5. Is everything according to my plan?
  6. Should I take the trade?

 

This may or may not be a perfect trading checklist to be followed but just an example that I’ll consider here.

 

How to make better decisions in trading?

 

Now, this checklist isn’t just going to remind a trader to trade according to their trading plan and that they shouldn’t forget to place a stop loss. This checklist will also allow them to take only the best of trades.

 

Right from the first point in the checklist, there are filters, and the trader would proceed further only if those conditions are met. If it doesn’t, it’s fine, just look for another opportunity.

 

By having such a checklist, you are also keeping yourself accountable and in check too. This means that you don’t deviate and take low quality trades and unnecessarily give away money as losses.

 

This power of checklist won’t just help you in trading but will help you make better decisions in all walks of life.

 

 

4. Keep yourself in optimal condition

There are so many studies that have been conducted and have proven with concrete pieces of evidence that when humans are not in their optimal state, they tend to make bad decisions that they only regret later.

 

But what exactly is optimal condition? It is about being at your best both physically and psychologically too.

 

I’ll tell you about physical optimal condition first.

 

Say that you aren’t eating good food and are working without having much sleep, would you function at your best? Of course not.

 

The lethargy and the fatigue will cloud your judgment and you will not be making good decisions in whatever you do.

 

How to make better decisions in trading?

 

We traders need to be at our best and you should do everything you need to do.

 

Believe it or not, nutrition and sleep is very important aspect of successful trading as we’re humans after all and these things are important for our functioning.

 

Now, on the other hand, being in the psychological optimal condition is important too and I’ll tell you why.

 

Our psychology or our mind is a very funny thing. It can either lead to unparalleled success or it can also lead you to complete disaster. And in trading, this is very true.

 

Say that you were trading yesterday and had a losing trade. You allowed the loss to affect you and you are back to trade today.

 

You are not going to be in your optimal psychological condition as you are now going to be thinking about recovering the loss and will start revenge trading.

 

Now tell me, is that an optimal psychological condition? No right.

 

You will have to train yourself and will have to keep your mind clear of all these things. It is easy said than done, but you need to do it if you want to become a successful trader.

 

Also Read: Emotional Trading

 

 

What do you think?

This was all about the importance of good decision making in trading and also, some tips for you to become good at making decisions.

 

What do you think, have you been making good decisions all this while, or were there decisions that you could’ve done better at?

 

Do let me know what you think about this blog post and if it helped you improve your decision making skills and achieve success in trading.

 

Don’t forget to share this blog post with others and let them also learn how to take their trading to another level.

 

You can always reach out to me for absolutely anything through the comments section below and I’ll get back to you at the earliest.

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