57. Why Every Trading Idea is Not Worth Your Capital

In today’s episode, we are going to be discussing a topic that we believe will help a lot of traders out and that is why every trade idea is not necessarily a trade that you should execute. 

New traders as well as traders struggling to find consistent profitability tend to find themselves in a hamster wheel of frustration which occurs as a result of wanting to jump in on every single trade idea that they come across in an attempt to make as much money as possible as quickly as possible.

The issue with this approach comes down to the simple fact that quality always trumps quantity and that the key to trading profitably is to only execute on the highest probability setups because that is where you have positive expectancy. 

We always mention that making money is the easy part of this industry, the difficulty, and were a lot of traders struggle, is in keeping those profits as you continue trading! 

The real difference between professional traders and unprofitable traders is that the professionals will pass on a potential trade idea if the market doesn’t give them exactly what they want to see, whereas the losing trader will take every single trade idea regardless of the quality of the setup. 

Our goal today is to provide you with some actionable tips that you can use in order to find the right balance between identifying trade ideas and executing on only the best ones! 

Before we get into trade ideas, let’s pull back the curtain on thoughts in everyday life and how those translate into trading: 

  • It is estimated that humans have on average 6,200 thoughts a day
  • A lot of these thoughts are ideas (hey I should clean my car, I’ll work out today, etc)
  • You have 6.5 thoughts a minute – but how many of these thoughts turn to action?
  • Very few – most of them enter our brain and exit without any meaningful action taken
  • Trading ideas are the same
  • It is a thought about the market – but it’s not a direct call to action, not every thought or idea will turn into a trade
  • We look at trade ideas as opportunities…. but not all opportunities are the same, and not all deserve your capital and mental energy

So what is the call to action for a trading “idea”?

  • You have to filter out opportunities to find only the best ones
  • One way to filter out these ideas is to use qualifiers
  • You can’t expect to have the perfect qualifiers on your first trade ever, it takes screen time and experience to refine them
  • The problem is these qualifiers change on market conditions
  • A good strategy to apply is to talk aloud when qualifying a potential trade idea. 
  • By doing so, we become the listener as well as the speaker.
  • It gives our ideas greater objectivity – we become more aware of those ideas, it adds a layer of mindfulness to what we’re doing. 
  • Let’s say I have an impulse to get long or short an asset because of the way it’s moving and I don’t want it to move against me. 
  • If I say out loud what I’m thinking and what I’m about to do, immediately I can recognize if it sounds ridiculous: “This is not how I do my best money management, I’m being completely reactive.” 
  • We get a layer of self-observation when we talk out loud that can be really useful. It makes us in a certain sense accountable.  

The process from trade idea to execution can be broken down into two categories: 

Trade Idea Formation –

  1. Morning mindset and wellness routine
  2. Pre-market preparation – news, market drivers, and catalysts
  3. Draw your levels of support and resistance
  4. Wait for the market to enter your level – this creates a trade idea, opportunity
  5. Qualify the trade using your engines (qualifiers, filters)

Trade Execution –

  1. Use order flow to pick a good place to put in your limit order
  2. Once in a trade, manage risk until you’re at breakeven
  3. Then manage the winning side of the trade to run the profits
  • Repeat

Tips to help you transition from idea to execution

  1. Split the process into two jobs.  Job one is to be the analyst, do all your thinking and modeling in this time period.  These are steps 1 to 5 above.  Job two is to be the trader that executes the idea, stop thinking and worrying, all that should have been done by the analyst.
  2. Speak your ideas out loud to hear your thoughts and become more mindful of your intentions. The key idea here is that when you talk an idea out loud – whether to yourself or a fellow trader – you force yourself to put the idea into clear words and make it understandable. This forces you to not only speak the idea but to hear it as you are speaking it. This can give you a fresh perspective of what you’re thinking and where your psychology is at! By observing your thoughts you become more mindful of your intentions. In this process, you might hear yourself talk out loud and realize the trade idea is not well-formed, other times you might be surprised at the conviction you have in the idea.  It’s amazing how bad our worst ideas sound when we actually put them into words!
  3. Journal your trade ideas, not just your trades.  Write down your thought process, record what you were looking at, and how it ended up working out.  In the beginning, you can learn a lot about trading by journaling your process, this is “free learning” with zero risks.
  4. Remember that not every idea is a good trade.  The problem with new traders is they assume it is their job to be in a trade, but in reality, it is our job to be in the good trades.
  5. There is no perfect trade.  Many traders focus on finding a trade that is a risk-free, guaranteed winner. The problem is by the time everything looks perfect, it will be too late to enter, you missed the move.  It’s a business of risk management, not risk elimination. There SHOULD be risk in every trade, and you should feel like it’s “still a little risky”.
  6. The only thing that is 100% certain is the past, but it won’t make you any money.  The only time you will EVER KNOW how a trade will work out, is once it’s done.  Focus more on reading real-time order flow and less on trying to predict the future.
  7. Practice the process until you create a flow.  Go to replay mode, and work on repeating the trading process steps until the transition between idea and execution feel seamless and fluid.  Repetition is key until it becomes a habit, it will eventually become second nature.  If you suddenly feel fear when you are about to trade, this means you haven’t practiced enough, it’s a confidence issue due to feeling incompetent.

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