The number of decisions alone required by day may be overwhelming in the world of high-speed trading. Whereas an average person makes up to several thousands of decisions per day, an active trader can go up to even 50,000. Every one of these decisions taken—each good or bad—decides the very fate of trading results. Mistakes or misjudgments are usually due to the interplay of the complexity of financial markets and pressure for quick, accurate choices. Such could be costly in their consequences and wipe out hard-earned capital within seconds.
Fortunately, decision-making could be reduced to manageable steps through which traders could approach their tradings systematically. Drawing on insight from the experiences of various traders and academic research, an organized method of decision-making can be developed. Such a process helps not only in making better decisions but also in avoiding those common pitfalls that derail many traders.
It’s going to walk you through a seven-step process in decision-making, made just for traders. If you will base your decisions on this approach, your chances of being able to make winning trading decisions that preserve your capital and grow your portfolio over time increase dramatically. Let’s go into the mechanics of making strong, effective choices in the market.
7 Steps For Effective Decision-Making
1. Identify the Decision
Clearly defining the decision is the first stage in producing a winning trading decision. The trader is faced with a constant choice in the live market—to buy, to sell, or not to trade. Each can be correct or incorrect depending upon the situation, but the realization of the necessity for the decision is what matters.
For instance, let’s say you absolutely trade the E-mini NASDAQ off a one-minute chart. The market is coming at you fast and you’re receiving fundamental, technical, and price action information. You need to know whether your actions will be to take a new trade, stay in your current position, or not be in the market. Knowing what this decision is up front will help you channel your attention to the next steps in the process.
2. Information Gathering
Once the decision has been identified, gather information that could be pertinent. It should include both technical and fundamental data. On a trade, it could be going over the economic calendar, analyzing your indicators, and knowing what’s happening in the greater market context.
One would consider, for example, the market participation if a trade in the NASDAQ is contemplated, news events, and technical indicators of moving averages or volume trends. Compile the above information for context to arrive at a decision.
3. Generate Alternatives
After gathering any information, all options should be considered. In trading, this might mean looking at other markets, time frames, or alternative trading methods. For example, a person may have his main market based on NASDAQ but senses that other indices, such as the S&P 500 or Dow Jones, are comparatively less volatile. So, he may interpret that the NASDAQ is offering the best opportunity.
Identifying alternatives includes considering a different entry or exit point and sometimes alternative trade setups. Since you consider these options, you will not miss possibly a better opportunity.
4. Weigh the Evidence
Listed it, now the time has come to weigh the evidence. This means that all of your information is assembled and reviewed in relation to your goals concerning the trade and your risk tolerance level. This will involve taking a close look in consideration to the rewarding potential in trading and the associated risks experienced in each alternative.
In evaluating a potential short trade in the NASDAQ for example, you would have to take into account the strength of the prevailing trend, any significant support and resistance levels, and upcoming economic announcements, which may influence the market. You would weigh this evidence to determine which of the alternatives offers the best risk-reward ratio.
5. Choose from Alternatives
Weighed against the evidence, it is now time to make a decision. In other words, in trade, at the present time, with all the information available, you need to identify the best course of action. This step is where you actually commit to an action—whether that is entering into a trade, adjusting your position, or staying away from the market altogether.
For instance, you could be analyzing the NASDAQ and come to a conclusion that the most viable opportunity is to make a short trade. You will then set up your trade, defining your entry point, stop loss, and profit target according to your analysis.
6. Take Action
The time to act is after one has decided. In this regard, acting in trading would involve executing your trade in light of your plan. Follow your strategy and resist second-guessing yourself. The real keyword here is discipline—once you’ve made a decision, follow through with it.
For example, you decide to short the NASDAQ; you will execute this order and then manage the trade according to your set rules. You can move your stop loss or take some profit when the trade is in your favor.
7. Review Your Decision
The last step in the decision-making process involves reviewing the outcome of your action. This will be an important step that most traders simply pass by. If you objectively review the actual results of your trade, it affords learning from your successes and mistakes to further improve your decision-making process each time it is used.
You would then go over the NASDAQ trade once it has been completed and see whether the trade had gone as expected: the market moved as anticipated, or did your entry and exit points turn out to be well-timed? These reviews help refine one’s strategy toward much better decision-making.
Decision-Making and Its Outcome in Trading (Case Study)
Success Story: Powered by Tekashi Kagawa
Excellent decisions leading to a bewilderingly successful trading career surely include Tekashi Kagawa. Kagawa started with a reasonably small portfolio size, $13,600, and built up his portfolio to an incredible $153 million within eight years. His success was rooted in consistently making good decisions, especially by implementing a structured swing trading strategy based on divergence.
Kagawa’s approach was disciplined and systematic. He would identify the opportunities carefully and gather the relevant data, weighing his alternatives before making a commitment to a trade. It is this structured process of decision-making which enabled him regularly to make profitable trades, eventually bringing him huge financial success.
Failure Story: OptionSellers.com Meltdown
On the other side of this spectrum, the meltdown at OptionSellers.com was a very poor decision in trade. That was a hedge fund headed by James Cordier. He made a chain of catastrophic decisions that took the hedge fund down. The fund went into naked short positions against natural gas, with unlimited liability and massive leverage.
The natural gas price jumped more than 60% in a little longer than one week, downing the fund and placing losses at more than $150 million. Basically, what comes out of the case is that a decision should never be made based on sheer recklessness without an understanding of the risk involved. It defies all logics not to go through a structured decision-making process to avoid such a disaster.
The Importance of Strong Decision Making in Trading
In trading, everything is about decision-making. What separates winners from losers is essentially the number of good decisions made versus bad ones. The seven-step decision-making process that was discussed in the above article will enable you to approach your trades systematically, therefore increasing your chances of success. While good decisions will protect and increase one’s capital, bad ones can easily drain your account.
It, therefore, goes without mentioning that a person has to be in possession of an organized way of making decisions, given the stress encountered in financial markets. This is not a theoretical process of identifying the decisions, gathering information, weighing alternatives, and reviewing outcomes.
That is an applied way through which traders can actively operate within the market. By harmoniously applying the process again and again in that way, you could come up with a well-informed, confident decision that perfectly fits your trading objectives.
Conclusion
Winning trading decisions can be won and developed over time. You are able to systematically approach your trades using the seven-step decision-making process for less and less costly mistakes. This isn’t just a decision-making process; it is an approach to coming up with the right decisions that are in harmony with your trading strategy and goals.
Take the examples of Tekashi Kagawa and the OptionSellers.com meltdown. Decision-making can either take a tiny portfolio and grow it into millions or can simply not blow out your account. Strong decision-making is crucial to your success.
