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Let Data Drive Your Trading Decisions Further

   

data-driven-trading

Businesses around the world invest heavily in analytics and Business Intelligence (BI) to feed decision makers critical data to help with making decisions on the company’s future.  In fact, people and organisations have never had access to more information in history.

I believe data driven decisions also has a place in trading.

Trading is best done when it is considered as a process – a rules based activity.  As you would have heard countless times, if you want to trade successfully, you need to develop and then follow a written trading plan that suits your personality.  

Why Every Forex Trader Needs to Follow a Plan

All consistently profitable traders have a plan they follow, as successful traders understand the importance of having a plan to guide them in their trading actions.

By developing a written trading plan, you can clearly define and articulate the rules you will follow, your money management approach and all the various components of your trading method.   Developing a good trading plan requires commitment and discipline.

What is your trading plan?  It effectively is a compilation of all your trading rules.  

So, what is it that separates the successful from those who fail? If you ask anybody who has studied trading for any period, they will answer ‘psychology’. They will add that ‘your psychology’ is what will make or break you as a trader.

Essentially, your mental ability to manage losses and profits, the good times and the bad, your capacity for risk management, and the self-discipline necessary to avoid becoming too greedy are all subsumed beneath the heading of ‘trading psychology’, along with many other similar skills and abilities.

Taking the Emotion Out of Trading

One of the biggest reasons that our mindset is such a determinant of our trading success is that our emotions influence our actions. Irrational emotions have little place in our trading; however, removing our emotions from our decision making is easier said than done.

It is our emotions that cause us to break the trading rules that have been proven to work over hundreds of years.

This brings me to my main point - having a system of data driving your decision making can be tremendously advantageous.  I believe the very best trading is done in a methodical, structured and well-organised manner – as unemotional and clinical as possible.  Good traders follow rules, systems and a process.

A tool that greatly assists with conducing your trading in a well-organised manner is a routine and trading process.  Your routine will be a logical progression from your written trading plan, and it will help you to adhere to your trading plan. You should aim to develop a routine that will guide you through all the necessary steps.

If necessary, you could write down your routine in the form of a list, in a logical sequence, and tick/check off every item as you complete it. This way you can be guaranteed to complete everything that you should.

The 7-step process I teach fellow traders is below.  It is a logical step by step process that traders work through.  This trading process provides traders some structure and a framework to work with.  It has them focusing on what they need to be focused on.

Decision making heavily influences your trading success, therefore anything that can help you focus on the important decisions that need to be made should be considered. Again, your written routine or checklist can assist greatly.

Another advantage of developing a routine is to assist with information management. An individual trader can easily be overwhelmed by the amount of information available, so your routine should reduce the likelihood of accessing information that is not relevant to your trading plan.

Here is the 7-step process for making data-driven trading decisions:

  • Step 1: Monitor and assess existing trades / adjust stops or exit where necessary
  • Step 2: Scan for potential trading opportunities
  • Step 3: Obtain shortlist from Step 2 and select trades
  • Step 4: Determine initial stop loss
  • Step 5: Calculate the trade / position size
  • Step 6: Execute the trades
  • Step 7: Do something else and let your trades run their course.  

This trading process provides traders some structure and a framework to work with.  It has them focusing on what they need to be focused on.

In the 7-step process, data can be used throughout.  In step 1, you are monitoring your open trades and will be using price data to determine whether you need to adjust any exit levels.  The most popular use of data in the entire trading process is for steps 2 and 3. Notwithstanding that fundamental analysis can use a lot of data, it is primarily technical analysis (TA) that uses price data and derivatives of price to assist with analysing trading opportunities.  

Traders do rely very heavily on price data to make clinical decisions relating to all components of TA to include identifying trends, chart patterns, volatility, support and resistance etc.  

Good traders don’t trade randomly and indiscriminately – they use a set of rules that directs them through the trading process.  

The reality is that our emotions are an integral part of who we are and each day they influence our decisions. As I have already noted, irrational emotions should have little place in your decision making. Remember, trading successfully is all about sound decision making, and it is essential that you are able to reduce the influence of your emotions on your decision-making process.

Conclusion

If your emotions have a great influence on your decisions, the chances are that you will break the established trading rules. You will be inclined not to cut your losses and not to let your profits run, for example.  Therefore, it is so important to have rules that are very data driven.

Data driven decisions can help in all aspects of the trading process.  From your trade selection to setting stops, size of trade and exiting in a profitable situation.  Implementing a ruthless approach to a trading process underpinned by validated trading rules can potentially take your trading to the next level.  

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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