Solving Trading ProblemsBeing a trader is really about solving trading problems — will the market go up, will the market go down, do I enter, where do I place my stops, where do I place my profit target, when do I move my stop up, and the list goes on and on.  They are all problems that, as traders, we are trying to solve.

This morning I was reading about the differences between “Good” problem solvers and “Poor” problem solvers.  And, because trading is all about solving problems, I thought I would modify the list to reflect how “Good” traders problem solve versus “Poor” traders problem solve.

Solving Trading Problems – Good Traders

1.  Look at the charts and decide on which timeframe to trade and whether to go long, short or be neutral.

2.  If a trader opts to go long or short, they systematically go thru a checklist for their trade criteria to ensure all criteria is met.

3.  They trust their methodology, trading skills, and decisions.  They have confidence in their trading abilities.

4.  They understand that the trade may not work out, even though they have carefully processed and analyzed everything on the chart.  However, over time and using risk to reward and money management, even with a low winning percentage they will increase their account size.

Solving Trading Problems – Poor Traders

1.  They cannot decide on which indicators to use, what timeframe or market to use, where to enter, or which direction to enter.

2.  They simply jump into the markets — typically obsessing over one or two things that “justify” an entry.  Then, if price does not immediately go in their favor, they jump out.  Their entire day is devoted to jumping in and out without any type of structure or rules.

3.  They have no  confidence in their abilities, skills or knowledge.  Instead, they feel lost and confused on the live edge of the market.

4.  When they enter into a trade, they are only thinking about the money they will make.  Then as price goes against them, they think of “real” consequences of a losing trade and opt to exit instead of potentially losing the money.  Or, they think it’s okay, what goes down will go back up, resulting in an overwhelming loss.

The difference between the two is that good traders plan a course of action, in advance.  A good trader knows BEFORE entering a trade, where their stop and profit targets are.  They know what a good entry is versus a bad entry.  They know when they will move their stop up and what would generate an early exit.  Of course, planning ahead takes time.  Time to think everything through, to ask questions, to identify worst case scenarios, and time to practice and refine.  This methodology instills confidence thru the knowledge that is gained via the planning process.  If something arises on the live edge of the market, then it is notated and their plan is modified.

On the other hand, poor traders bypass the “thinking” phase.  They do not plan ahead or allow others to plan ahead for them.  When others do the planning, the poor trader misses out on the knowledge phase.  This leads to a lack of confidence because they do not have the knowledge that was gained via the planning phase.  Instead, they are trading based on a “seat of the pants” theory — in other words, they will learn, on the live edge of the markets, all that can go wrong or little details that they are missing.

The good news is that every poor trader has the option to become a good trader by learning techniques for solving trading problems.  By adopting a structured approach to entering, exiting, and moving stops, as well as money management, all traders can become “Good” traders.  It is all in the approach that the trader decides to take.