Improve your decision-making process in trading

FX_IDC:USDPLN   U.S. Dollar / Polish Zloty
The trader's decision-making process is one of the most important concepts in trading for me. Why? Results depend on a good process.

So what is a trader's decision-making process?

Generally speaking, these are all the thought processes, analytical processes and decisions you make from the initial analysis ("idea") to the closing and analysis of a position. The entire thought process that goes on in your head.

This approach came to my mind, even imposed itself when I thought about how AI in trading would make decisions - the best possible ones. Then the same principles were already obvious in application to traders. And still later it turned out that the best traders have specific elements of the decision-making process, practically absent in other traders.

That's enough history, now what came out of it...

What is a trader's decision-making process?
A trader's decision-making process (or the decision-making process in trading) consists of two components: rational (analytical) and emotional. The more experienced the trader, the more importance he attaches to the emotional component - but in a specific sense. This does not mean that emotions dictate to the trader what to do.

Very experienced traders treat their emotional state as an additional source of information, and are able to "stand by" and hear the voice of intuition above and beyond the emotional noise. To quote one experienced trader:

"If I feel pressure in this situation it means that others in the market also feel it. The one who can withstand it better will win."

What does a trader's decision-making process consist of?
Let's break down your decision-making process into components.

1. It starts with analyzing the markets and choosing an instrument (specific stocks, specific currencies from the available pool - for example). What factors drive your choice, why did you choose this instrument and not another? Here we have the first decisions. On what basis do you make them?

This is important, because if you start thinking about how to improve your decision-making process in order to have better results - you will understand that... perhaps it is possible to choose better. I'll state how the best do it: they learn to choose the best inputs from those available to them. In the sense that if they specialize in a certain sector of companies - they choose shorts or longs with the best views of profits. Of the many opportunities that are available, they try to choose the ones with the best prospects.

The best traders try to choose only the best opportunities from among what is available in the markets they trade. They don't trade on everything.

What does this mean for you?
It means that you can, and even need (!) to work on your criteria for selecting an instrument, so that you choose the one on which you will find it easiest, on which you will earn the most (potentially). The selection criteria may be different for different Treders.

In the case of AI systems, their development goes something like this: searching for the best opportunities from what is available. At the same time, it will take a fraction of a second to search, for example, five thousand companies in this regard. And from this vastness, the system will select, for example, 100 for further analysis and trade. I mention this to begin to slowly make you aware of what analytical and decision-making power you are dealing with, because you won't jump over it.

But let's get back to the decision-making process.

2 We have selected for example, the best companies, what next? Let's assume that we want to enter the market, as long as the criteria are right.

And here comes another question: where, among the selected companies, are the best situations?

A simple example: we want to trade longs on companies with good fundamentals. Our selection factor at this stage of the decision-making process may be volume behavior. We are concerned with entering such movements, where volume is clearly increasing - which suggests that the interest of buyers is growing. At this stage we will rank the selected companies according to the best situations of increasing volume.

Somewhere the volume is too low, somewhere it is too high, and the price is not rising much (which is not the best option). So we have several companies with the best situation at this stage.

In this example we used volume, but we can analyze more elements: candlestick formations, Fibonacci levels, MACD, CCI and thousands of other indicators. We can also use confluence of indicators and situations, for example, the price reaches the average 200 from the top, is close to resistance and at the Fibonacci 62% level. Here several things meet at once, it can be an interesting decision-making place.

With several combinations to choose from, ask yourself which indicators are best for your purposes?

3. Now it's time to decide how much capital you will invest.

A trader's decision-making process is a series of analyses and decisions.
Each distinct element of the decision-making process you can improve, address from different sides, analyze and improve according to different criteria. This gives you the opportunity to improve your results - improving one by one each element on which these results depend.

How does the trader's decision-making process differ between experienced and novice traders?
According to a study of institutional traders - less experienced traders use emotion avoidance strategies in the same situation. This makes a difference and a barrier for beginner and intermediate traders. The best traders are able to withstand a lot of long-term pressure by entering into it consciously, while less experienced traders at some point succumb and run away from the same position.

Both groups of traders differ in experience, but not only - they differ in their strategies for dealing with emotions while trading. Because it turns out that not only experience matters.

Studies show that traders with very high trading experience (e.g., more than 20 years) and not using strategies for working with emotions like the best traders - have poorer results.

To give just one example: getting to the TP - due to the pressure of the markets, traders often run away from positions, emotions, the pressure on the psyche is too strong. The psyche is the filter through which all decisions pass. And it can disturb each decision and each step - from the initial analysis to the execution of the entry.

The way you handle your emotions in trading allows you (or not) to survive chaos, volatility, uncertainty and panic, allows you to continue to enter the market when others have long given up, opens new doors to results. Proper handling of emotions is essential to a trader's correct decision-making process.

A recipe for improving trading performance with the help of a trader's decision-making process
In short: break down the way you make decisions into components. Learn as much as you can about how you can improve each of them.

That's not everything, of course, but that's all you need to start with. In the future, I'll write more about the next steps and the best practices you can use there (click follow to get notified).

If you liked this post, give it a boost 🚀 and drop a comment so we know to publish more for you. Cheers!


The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.