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The Confidence System: A Method to Combat Overtrading
How confident are you?
Overtrading is a serious issue for most traders, including myself. One of the main systems I have implemented is grading my level of confidence in a setup, which I’ll show you how to implement below.
The Confidence System works like this:
1. Define what your setups are.
2. Grade your level of confidence in those setups on a scale of 1-10.
3. Create a rule set to only trade setups that meet a certain level of confidence.
How You Can Implement the Confidence System:
Defining your setups
Having a clear understanding of your setups is one of the most important pieces of successful trading. You have to know what trades make you a consistent return in the market, and then continue to double down on those in the future.
While you define your best setups, you can also take a hard look at what patterns have performed poorly for you over a large sample size of trades. Categorizing these as ‘poor setups’ will help you avoid executing them in the future.
Grading your level of confidence in these setups on a scale of 1-10.
Your best setups, the ones that have netted you the largest amount of money over the last 300+ trades, should get a higher confidence score than one that has netted you 1/2 or 1/3 of the money in the same amount of trades.
In the same light, your lowest-performing or under-studied edges or should get a lower confidence score. Having this range clearly defines what you should and should not be trading.
Using The Confidence System to combat overtrading
If you are struggling with overtrading, it’s very likely you aren’t only trading your best setups. Your best setups are the ones that will be scored high on the confidence scale (8+) for me.
You must also be realistic - how many setups do you have in your arsenal that you feel really confident about? Most traders have 2-3 that they know they can always rely on when trading poorly or can go to when the market gets hot.
I’ve realized that a majority of my losses and overtrading come from trading my least confident setups, which of course shows me that by focusing on my most I can combat the habit that costs me the most amount of money.
How I apply the Confidence System in Real Time
Here’s a visualization of what The Confidence System looks like for me:
As you can see, I’ve listed all of the potential setups I can execute on any given trading day in the market, from best performing to worst performing (step 1). I’ve then gone through and color-coded them based on confidence score (step 2).
The last step of the process is to decide which ones I should trade, and when. Based on my post-trade analysis, I should only be focused on the 8+ range. If I’m on a hot streak and the market is really working, I can dip into the less confident range (confidence scores 5-7). At any point, I know the exact setups that I shouldn’t be trading no matter what (confidence scores 1-4).
Now when I go to make a trade the next day, I can refer back to this list and know exactly where I should be focused - reducing my ability to overtrade.
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