The You Factor, Part 3 of 3, Know the "Why" of Your System

Don’t use a system or put indicators on your charts unless you can understand and know why they should work. Just because it does work or has been working, doesn’t mean it’s going to work all the time, in the future, if there is no market theory movement reason behind it. Even if it has been working, for example, when two lines do something specific, or for the past 6 months on your optimized settings, that’s great, but you need to know it’s going to work going forward. You need to know for the future why you would trust your money in whatever it is you’re doing. You want to understand the why. You need to know your rules, and you have to know you will be able to trust in and follow the plan in those intense moments while trading.

Taking Care of You

Don’t just look for a system that works. You want one that works and that you will work. Ask yourself if you know why it works well enough to trust it and would work it. You have to account for you and the psychology behind you. You can have the greatest system- one that wins more than it loses- but no matter how good that system is, if you have moments of hesitation, you need to know what caused you to hesitate. Find out why and know what’s happening in your psychology. Your psychology can mess up even the greatest systems. Trading definitely does unveil our weaknesses and greatest fears. The hardest thing to overcome is your psychology and keeping your mindset confident with no doubt and being able to execute.

A Robot Won’t Solve It

Another alternative traders sometimes go to, are robots. They decide the reason why the system isn't working is because they can’t work it, or they’re not disciplined enough, so then they want to find a robot or an automated system to trade for them. The robot can be programmed to execute the how part, or ABC’s of your system, but it can’t help you with the 123s, which is reading the market, and how to react to it. Robots aren't able to react to Google earnings reports, or fed funds releases, or the latest tragic accident or war breaking out. They can’t make the 10% style decisions, which is the trading psychology involved of reading the market.

Reading the Markets

For a good system, you will need price action to define entries, and expected movement and volume to confirm a move. You will need to understand those components and how they affect the market.

The market is driven by orders. There are expectations of movement, based on option pricing, which is based on traders’ opinions of how far the market is going to move. Markets are going to go where the orders are located and it should stay within these expected ranges. The only time the market moves outside these expected ranges, is when there are more orders than normal. When volume is exceeding expectations, then that’s when you will expect the market to go outside that expected movement range. It’s just how a market works; a market is made to fill orders.

Expected Movement and Volume

Master expected volume and expected ranges in your trading time frame, but also the expected moves on a day. Then you will be confident and know when to turn off trades, know when a market is going to be choppy because volume is way below expectations, and know when a market is going to trend because volume is way above expectations.
Once you understand those important components of the markets, and you understand how and why your system accounts for those components while profiting, you will have what you need to build trust and confidence to execute and trade your system. Learn to define your entries, set stop losses, and know exactly how you are going to let your profits run on your trend and reversal trades. Become the guru; don’t try to follow a guru. Learn what you can, but learn to make your own decisions and trust in those decisions and you will have the you factor down.

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