When someone says the term "Trading Psychology" they are referring to the emotions and mental state of a trader that may dictate the success or failure when trading any financial market. This trading psychology is unique to the individual trader. However, in general, it represents various aspects of an individual’s character and behaviours that influence their trading decisions and consequently, the actions they will take in the markets.
Trading psychology can be as important, if not more important, than other attributes such as Fundamental Analysis, Technical Analysis, Price Action Analysis and Sentiment Analysis and trading knowledge, experience, and other general skills that are important in determining if a trader will be successful in the markets.
Discipline and risk-taking are two very important aspects of trading psychology since how well a trader will implement them are essential to the success of their trading plan and ultimately if they can make a profit or not. Fear and greed are commonly associated with poor trading psychology. Hope and regret can also be a part of negative trading behaviour.
In the following Wiki, we will explore many aspects of Trading Psychology as well as strategies to help cope with negative trading behaviour. This is a large Wiki so take your time in the table of contents and pick what seems right for your situation.
This Wiki is a part of our Essential Forex Trading Guide. Be sure to check that out HERE.
Introduction to Trading Psychology
You may have heard that the failure rate for new traders is extremely high. However, this is especially true in the case of retail traders. But why is the case? The answer lies in the focus of what retail traders tend to focus their learning on. Let's use two traders as an example:
The first trader is a complete newbie who has decided to trade from home utilizing the information from a bunch of different courses he found on the internet for his training. It’s highly unlikely that this trader will ever get exposed to enough training on the topic of psychology. He/She may hear some famous clichés or even read a book or two but generally, the focus on psychology will be very low when compared to the other elements of successful trading. In fact, he will probably only be exposed to Technical Analysis alone for his training because that is what most training packages on the internet chose to focus on.
Therefore most retail traders will focus the vast majority of their training on Technical Analysis. Technical Analysis is the choice of almost all retail traders to use with their trading efforts. The reason for this is that Technical Analysis is sexy, very visual, simple, and interesting. It's also very black and white because if this pattern occurs you do this, if the indicator says this then you do that. Unfortunately, it’s also fairly useless without the other elements of professional trading such as Fundamental Analysis, Price Action Analysis and Sentiment Analysis, Trading Psychology and Risk Management.
Choosing to focus on Technical Analysis alone is the most common mistake that retail traders make. However, it’s not necessarily the retail traders' fault. 99% of all the training programs on the internet are all based on Technical Analysis. So how is it possible for them to get all the info they need to succeed when it’s virtually impossible to find it all in one place? There are some courses that will teach some risk management skills and others that will talk about having proper trading psychology but this will likely be a small component of the training.
On the other hand, if we look at a trader who has just completed and graduated an institutional level training, they too will have received much education and training. They will also learn about Technical Analysis but the biggest thing we want to point out here is that the institutional trader will have extensive exposure to training and development on their trading psychology. This will not just be a course; rather, keeping a healthy trading psychology will be an ongoing process over their entire trading career. There are plenty of trading firms that pay big bucks for in-house trading psychologists. The reason they would do this is because the traders are the firm's money makers and making sure these traders are making sound trading decisions and not allowing outside influences to affect their trading is a major priority. Paying a good trading psychologist a couple of hundred grand per year can save the firm millions so it's a no-brainer for the firm.
The Importance of Trading Psychology and why you can’t Stay in the Game without it?
Let’s now look at an illustration that will help you not only understand the importance but also why so many people tend to overlook having a proper trading psychology.
The Right Way to Aquire Skills:
Let’s imagine that you are starting to learn how to play the sport of golf. What are the first things that you need? The latest and greatest set of golf clubs, a membership to a prestigious golf club, or maybe some really expensive golf shoes so you look good on the course? No! It’s obvious that anyone needs some proper training before getting any of that other fancy stuff.
So the question is; what is training? Well, training in this example is simply working with an experienced golfer who can show you all of the mistakes that golfers make so that you don’t make them. They will also show you what you need to do correctly in order for you to be successful. You will learn things such as how to have the correct golfing stance and a good swing.
The next thing you need is practice, and lots of it. Your training should be ongoing, maybe a couple of times a week, but in between, you will be trying to get as much practice as possible. After all, there is that old saying that "practice makes perfect". This is true of pretty much anything you attempt to do in your life. The saying may not be 100% accurate because most people will never become perfect no matter how much practice they get but they certainly will never be any good at golf without any practice. Following this routine with great dedication will lead to success over a sustained period of time because those are the things you need to do that will make yourself good at golf.
Eventually, you will get to a level in golf where you won’t have to constantly be thinking about your swing or stance because all of your practice and training instilled those habits in you that you need to be good at golf. Being able to play golf naturally without thinking will be your main edge over your competition. Professional sports players refer to this process as "getting into the zone".
There was once a famous American football coach who said that "in times of adversity you sink to the level of your training". Well, if your training is not very good then when you get stressed out or are in a tough position you will likely golf poorly. On the other hand, if your training is extensive then when you come under pressure you will perform well. This is as true in trading as it is in golf or anything else that requires training and practice to be successful.
After you have mastered your edge the next thing to do is increase and refine your edge using the smaller things such as the latest set of clubs or better shoes that we spoke of earlier. However, no matter what clubs or shoes you use your core skills will always be there and you will perform better than other people who do not have their core skillset properly developed. You are way ahead of your competition if you practice the correct things over and over.
The Wrong Way to Approach Acquiring Skills:
Now imagine that instead of going down the path of working with a professional golfer and practicing until you are highly skilled you instead went down the first example and joined the best club and bought the most expensive shoes in the hope of improving your performance. This surely sounds ridiculous now that we have pointed it out in this way but this is exactly what most retail traders do when they focus all of their education on the “system” they are using, Technical Analysis, the Forex_broker broker they are trading with, or even information they purchase and use for their trade analysis.
One of the true keys to trading does not lie externally with any system but rather the key lies firmly inside your mind. The way that you develop your trading skills are exactly the same way as you do in the sport of golf. You start by focusing on the skill and the actual process of trading. Then, at some point in your learning, the importance of these items drop dramatically and the most important thing will then become your inner game.
The mistake that most new traders make, and this is particularly true of retail traders, is that they focus all their efforts on the skills of technical trading. They continue to do so thinking that they need more and more skills to improve when in reality the basic skills of trading are actually quite simple. There are more skills needed than just Technical Analysis. Traders should also become skilled in Fundamental Analysis, Sentiment Analysis, Price Action Analysis, Risk Management, and Trading psychology.
Once you have all these concepts firmly cemented in your mind it's simply practicing and working on your inner game that will improve your results the most. The true key to successful trading is being able to get into the zone and trade in your natural state without thinking too much about what you are doing. Professional trading coaches call this "emotional state mastery".
It’s important to understand that some states are perfect for being able to perform at your peak potential while other states do the exact opposite. This means that some states will actually stop you from performing at your highest ability. It goes without saying that when you are trading you want to be in the best and most positive states that will help you achieve your goal of performing at your peak potential. We all ultimately want to end up making money, and being in a positive state to achieve this is absolutely vital to your success in the financial markets.
A way for you to gain some good insights into how to perform under pressure is to use the example of military Special Forces. These highly trained soldiers have a combination of endurance, navigational skills, determination, persistence, problem-solving, decision-making strategies, and emotional state mastery.
In the Special Forces, it is recognized that they need highly skilled soldiers and a good mission strategy. However, what is considered to be most important is being in the right state of mind to deliver effective results. Even the best soldier will be less effective if they are not in a fit mental state to perform. Therefore, creating the right state for those soldiers is really important for successful combat operations. The same applies to trading.
You could have taken all the best courses, know all of the correct theories, and have all the best strategies up your sleeve but if you are not in the right emotional state you will find that failure in the markets is just the beginning of your problems. The fact is that your psychological state is the most important thing of all because without it you will not be able to use any of the skills you have worked so hard to develop. In trading, it is common to see really smart people do incredibly dumb things because of some emotional challenge. We are all guilty of doing things that we know we shouldn’t.
Just like a soldier, we need to have three main components of a positive state, excellent strategy, and great skills to be well-rounded as traders. All three are required but the one that will control your final outcome is your state. The importance of state cannot be understated.
When you sit at your trading desk you will need to have a strategy to make money. You will be utilizing your skills such as market analysis, identifying trade opportunities, and filtering out bad information. However, everything else aside, what truly controls and influences your overall performance is the state you are in while you are trading. Let's explore more of this now.
What is State?
States are the effects and the consequences of whatever is happening in your mind at any specific time.
States are dynamic processes. What this means is that your state will change regularly throughout the trading day, and can fluctuate minute by minute. For traders, it sometimes feels like our states can change almost every second because we are dealing with real money and money can often be the main driver of emotional states. States are emotions like confidence, anger, motivation, anxiety and so on. All of these things are dynamic processes or feelings.
Your personal performance in everything from trading to relationships to sports and so on is for the most part influenced by your feelings. How you feel will affect how you will perform in the moment. These feelings don’t just happen to you. They are actually choices that we choose to make on a second-by-second basis.
Professional sports stars have learned how to choose which state they want to perform in order to succeed and we can look to draw some parallels for us to perform in our peak state as traders. These highly paid athletes will go over the entire game or race in their heads long before they ever set foot in competition. They do this so that they will be prepared for any situation that is thrown at them because they already have an action plan for how they will react to get the best possible outcome.
A lot of what state is all about is the fact that thoughts are things and the more positive or negative things you hold in your mind the more positivity or negativity you will feel. Now, this may sound a little out there but it is true that the more you focus on something, whether positive or negative, the more you make that real in your mind. This is because your mind cannot distinguish the difference between something that happens in real life or something that has been vividly imagined. So if thoughts are things then we can choose to focus on the things that will put us in the best state for trading.
Potential and Performance
To understand this concept of state a little better we are going to look at two words, potential and performance:
How often do you perform to your peak potential? The ultimate goal for us traders is being able to reach the point where we can consistently perform to our maximum potential.
To quantify performing to your maximum potential we can use a famous equation that helps us explain this process of performing to our potential:
At any specific time, we are performing to our potential minus any interference.
What a powerful sentence that is: at any specific time, we are performing to our potential minus any interference. Obviously, in the ideal scenario, there is no interference and this is the state that many authors talk about. When it comes to the subject of performance these authors have coined this state as the state of zone or flow. You might recall a famous trading book on psychology called Trading in the Zone by the late Mark Douglas. This is definitely a book worth checking out.
A prominent US psychologist and expert on performance and flow found from his extensive research that there are eight key factors evident when someone is in the zone:
- A challenging task at which you may succeed. This is matching a challenge to your capability.
- A merging of action and awareness. This means you are in time, tuned in, and losing track of time.
- Your task has very clear goals.
- Your task provides immediate feedback.
- You have total concentration on the task at hand.
- You have a distinct feeling of control over your actions.
- You have a complete loss of self-consciousness.
- The transformation of time from slow to fast.
How true these points really are. Have you ever started reading a great book and then realized 3 hours had passed? What about times when you were enjoying playing a sport or game so much that you completely lost track of time? This can happen in trading as well.
From this research and other studies we can break down the process of getting into the zone into three key elements:
- Matching the challenge to your capabilities.
- Ensuring that you have clear goals.
- Focusing on the task at hand which in turn will give you a feeling of control over your actions.
The other point we looked at in an illustration earlier is the importance of practice. Remember, in order to become truly skilled at golf, or anything for that matter, it’s not only training we need but also a lot of practice. From a psychological perspective, the reason this is so powerful is because being in the zone is automatic and performance tends to transcend consciousness. In order to achieve this automatic performance you need to have a high level of skill. In order to get that high level of skill you need to have a lot of practice doing something consistently successful over a sustained period of time.
To summarize this point, in order to trade in the zone we need to have a high level of skill and in order to get that high level of skill we need to practice.
To illustrate this further we can look at the 4 stage learning model of competence. In this model, there are 4 stages to becoming extremely skilled at any task or process and this is called the 4 stages of competence.
The 4 Stages of Competence
Most traders desperately want to become profitable instantly and not have put in any of the work that is required to become a consistently profitable trader. We understand why this is. The human brain is designed in a way that it will do almost anything to avoid any kind of short-term pain. This is a self-defence mechanism that has been ingrained in our unconscious minds since the beginning of thought itself.
This reality is unfortunate because science tells us that it’s the process that you go through, the challenges that you face, and how you react to those challenges that will determine how successful you become as a trader or anything else in life for that matter.
It has been proven with a high degree of certainty that in any endeavour in which you as a human embark you will go through 4 stages of competence. You will only gain this high level of mental development if you see this skill through to proficiency which takes a lot of practice. The 4 stages are:
- Stage 1: Unconscious Incompetence
- Stage 2: Conscious Incompetence
- Stage 3: Conscious Competence
- Stage 4: Unconscious Competence
You can read more on the dedicated Wiki page for The 4 Stages of Competence HERE.
What Exactly do you Need to Practice with Trading Psychology
We have just touched on the importance of your state when trading. Being in the correct state is far more important than your skills, system, or the broker that you use.
There is a fairly famous author in the trading world named Mark Douglas. He specializes in trading psychology and has authored some of the best-selling trading books of all time such as 'Trading in the Zone'.
Let’s now look at some of the more interesting findings in a little more detail and see how we can apply these findings to our trading.
In one of his books, Mark Douglas talks about the fact that when trading in the zone you operate with a complete lack of fear because fear is mostly retrospective based on what has happened in the past. Fear can also be predictive based on some future event that has not actually happened yet. This means that we are creating fears with our thoughts that are not our true reality or experience.
Think of a time when you had a fear that was never realized. Maybe you have experienced fear prior to giving a presentation that someone would laugh at you. This caused you real anxiety before the presentation but it likely never happened. Your mind created that fear but it never actually happened in real life. It’s very rare that fear is in the here and now other than in extreme events that catch us off guard.
Another thought from the book is that entering this zone is achieved much more easily when certain beliefs are in place. These beliefs are as follows:
- Your edge is strong and you have an unshakeable belief in an outcome with an edge in your favour.
- You truly and deeply accept the loss.
- You know that once you are in a trade anything can happen and anything is possible but you remain neutral and flexible in your approach.
- You expect positive results for your efforts with an acceptance that whatever results you are getting are a perfect reflection of your level of development as a trader. Your results are also a reflection of what you still need to learn.
Aside from these beliefs for getting into the zone, there are also some barriers to getting into that state.
Trading psychologists suggest that the majority of trading setbacks are a result of performance anxiety. Performance anxiety is things such as anxiety, stress, fear, anger, and frustration. These are all states that most traders feel but at the same time, they are also states that work against them from achieving peak performance.
- Anger causes our perception to change.
- Frustration causes us to feel like no other positive possibilities exist.
- Fear stops us from seeing any opportunity at all.
- Anxiety either causes us to freeze up or to run.
- Stress narrows our attention and eliminates our focus.
These negative states cause the interference that we mentioned earlier and stop us from performing to our potential. Remember, at any specific time we are performing to our potential minus any interference.
Mark Douglas goes on to state that there are 4 main trading fears:
- Fear of being wrong.
- Fear of losing money.
- Fear of missing out.
- Fear of leaving money on the table.
These 4 fears can be broken into the 5 core obstacles that stop us from getting into the zone:
- Fear of being wrong: In order to combat this we must accept that losses are and always will be a part of trading, there is just nothing that can be done to change this fact. We also need to recognize that it’s not losing that really hurts our feelings. It's trading badly that causes our issues.
- Fear of losing money: To overcome this you need to realize that no matter how great a trader you are, you will always miss opportunities. You don't need to get in on every single opportunity to be profitable. It’s all about consistency over the long run. If you miss a great trade then this gives you an opportunity to study the outcome. You simply move on and look for the next trade.
- Focus on profit and loss rather than the trade: To stop this you need to start measuring your success on how well you traded and not how much money you made or lost. Successful trading is all about the correct process of trading. Remain present and in the moment, be task-focused, and control all that you can control.
- Losing objectivity: Challenge this by constantly asking yourself, “If I was not in this trade right now what would I do, buy, sell, or do nothing?” You need to be able to view your trade as if you were a third-party observer. If you determine there is no good reason to get out of a trade other than you are fearful of a profit evaporating then you need this third-party perspective to help you gain control over your emotions.
- Taking inappropriate risk: Combat this by thinking in probabilities while considering the risks and rewards involved. What are the odds of this trade working? How much can you make or lose? You need to trade a position size that matches your capabilities and also your account size and allow yourself to trade to your potential. You must not trade like the current trade you are in is your last trade because it might very well be if you have taken on enough risk. In other words, you really need to remove your ego from your trading.
These 5 areas are the main barriers to entering the zone but there are also some lesser things that get in our way if we let them:
- Lack of preparation.
- Lack of practice.
- Lack of discipline.
- High levels of stress.
- External distractions such as life away from trading.
As you can see, a lot of this inner game is about creating the correct beliefs. Now we come back to the beginning of this section by mentioning how absolutely imperative it is to operate in the correct state. This is a state that allows us to operate under those proper beliefs and ultimately trade in the zone of psychological success. This is essential to making it as a professional trader for the long haul.
How do you Create the Optimal State for High Trading Performance?
In this section, We are going to highlight 14 different strategies that you can implement to achieve your optimal state for peak trading performance. But before we look at these individually we need to first understand that all emotional states are comprised of two key factors:
- Physiology: These are elements such as heart rate, the way you’re breathing, your posture, your facial expressions, and the gestures you make.
- Internal representations: These are things such as what and how you think, how you feel, and what you imagine in your mind.
By using this information we can start to take steps to take control of our states. As a trader, it’s absolutely critical to be aware of the states that allow you to trade with optimal performance. Obviously, you want to be in the best state when you are trading because, as we know, your state will directly impact the decisions you make which in turn will have a huge impact on your trading results.
We will now look at the 14 methods and strategies used by professional traders to manage and control their emotional state allowing them to trade in the zone. Keep in mind that these are not the only ideas that you can use to help you manage your states. For some people using a hybrid of a couple of ideas might work best. The important thing is that you find out what works for you.
1. Energy Management
Energy is the foundation of all emotional states and it is critical for sustaining focus and concentration.
There are 4 key factors in having a strong energy base:
- Nutrition: This means having a balanced diet with plenty of water. You should eat healthy foods and stay hydrated.
- Exercise: This could be having a balance of cardio and weights with maybe 3-4 x 30-minute sessions each week. Or maybe you can try taking up a new sport that gets your heart rate up for a sustained period of time.
- Rest and Relaxation: This means that you should switch off and have some downtime. You can’t sustain being on 24 hours per day. Your mind and body need time to absorb the day’s events and recharge you for tomorrow.
- Sleep: You should be getting a minimum of 7 hours per night on a consistent basis. Some people are able to function on more or less but the key is that you let your body tell you what works best for you.
To sustain your concentration throughout the day it’s important to take regular breaks. The reason for this is because our bodies work on something called ultradian rhythms. These rhythms are naturally occurring in 90-minute cycles of peak focus and energy followed by a natural recovery dip of around 20 minutes. The problem we have in modern society is that these natural rhythms are very often suppressed by the use of coffee or other stimulants such as Red Bull. This means that we never get the natural recovery time our mind needs.
This dip in energy is often signalled to us by things like hunger pains, daydreaming, and a general loss of concentration. This recovery time is the minds idling time and allows the unconscious mind to process information and integrate learning.
By denying your mind these breaks, even with a positive intention, we end up with subsequently lower and lower peaks of energy. This explains why most of us have the feeling of declining energy throughout the day.
To combat this you can use the following ritual:
- Rest and relax. Get away from the computer screens, rest your eyes, and rest your mind and body together.
- Eat something healthy.
- Drink plenty of water.
- Stretch by getting up and moving around, taking a walk, or anything that will get your muscles mildly active.
By keeping your energy levels up and maintaining your body’s natural recovery cycle you will be in a much better position to trade successfully if you are planning on trading for several hours.
2. Breathing Techniques
Breathing techniques are a very simple way to focus yourself throughout the day. Perhaps the most effective breathing technique is called centering. Centering is a very simple technique that traders can use to control stress and muscle tension, block out negative or distracting thoughts, and refocus their attention on things relevant to the task of trading.
Here is how you can practice the concept of centering:
- Sit in a comfortable but upright position with your legs and arms unfolded and uncrossed.
- Take a deep breath from your abdomen and imagine the air circulating in and around your entire body.
- Exhale slowly and completely. As you do this feel your neck and shoulders relaxing, and let this relaxation spread through your entire body.
- As you finish the breath think about the single most important component that you need to focus on right now.
- Breathe in for a count of 5 in through the nose and 5 out through the mouth.
- Focusing your breathing through the diaphragm or lower belly is highly effective at centering emotions and achieving mental states that are clear and focused.
- Practicing this technique regularly will make it more and more automatic.
Centering is just one form of breathing technique. By doing a simple google search you are sure to find all kinds of breathing techniques that you can experiment with. The key is that you find one that you can incorporate into your daily routine.
3. The Process of Trading and of Controlling the Controllables
When you arrive at your trading desk each morning, what is your goal? Is it to make a certain amount of money, make a certain amount of pips, or maximize the number of opportunities that you personally take today?
When considering these questions there are two types of goals that you should be aware of:
- The outcome goal.
- The process goal.
Outcome goals are focussed on the end results such as how much money you make or the number of pips you make.
Process goals are specifics such as things like behaviours, feelings, or processes required to achieve the desired outcome.
A good way to describe this is by referring to the outcome goals as a jigsaw puzzle and the process goal as the pieces of that puzzle. Only by putting the process pieces of the puzzle in their proper place do you complete the outcome goal. Both are very important but the key is knowing when to focus on outcome goals and when to switch to process goals.
Generally speaking, the time to think about outcome goals is in the run-up to or after the performance. The time to think about process goals is immediately before and during the performance.
Just like any plan, once you have clearly defined what your desired outcome is and the reason why you want it, the next logical question is how you will go about getting it.
Your process goals will be elements such as what you want to be doing and being. Doing goals will include areas such as preparation, how you are picking an entry, how you manage trades, how you exit trades, and how you are evaluating trades. Being goals include feelings and thoughts that are important to have.
Most of your process goals should be 100% under your own control. One of the most important aspects of your focus is remaining process focussed. This means focusing on the process to be done and not the overall outcome. The key to this is to stay in the now and present and take each trade by trade.
In trading, different tasks require slightly different types of focus. For example, monitoring or stalking a trade calls for a broader external focus because you are searching for a trade. In direct contrast to this, being in the actual position requires a more narrow internal focus because you are now focussing on something that you have. Once you are in a position you switch from external focus to internal focus.
As another example, evaluating or reviewing your entire trading day would require a broad external focus. Whereas mentally rehearsing for the day would require a narrow internal focus. The absolute key to this strategy is focusing on the process of controlling what you can control. This cannot be overstated.
To make this effective the best exercise you can perform is to literally write out your goals as if they are happening in the present tense. Make them positively phrased, then mentally rehearse them, and visualize yourself experiencing them.
Some examples could be:
- “I am coming to the office today feeling energized, positive, and expecting to make money.”
- “I am doing my daily research, preparation, updating my knowledge, and calculating my levels.”
- “I am entering my trade in accordance with my well thought out strategy.”
- “I am feeling calm, confident, and composed when I am in my trades.”
- “I am objective and positive when evaluating my trades.”
4. Managing the little Voice inside of our Heads
Managing the little voice inside your head is something that psychologists refer to as self-talk.
When researchers interview top sports athletes most of these athletes report absolutely zero self-talk when they are performing in the zone. This means that performance is externally oriented with no internal dialogue. This reinforces the point that being in the zone is an externally focused experience.
If we engage in self-talk it should be very brief and extremely positive. These are known as performance cues which is a simple word or short phrase that is performance-based and linked to a specific positive action that you want to have. Using performance cues correctly can be used very effectively to maintain focus. They can also act as triggers for desired states or actions.
A performance que consists of 3 key elements:
- It’s performance-focused.
- It’s positive based on what you need to achieve.
- It’s very short and simple.
Some examples of performance cues used by professional traders are:
- “Patient and profit”
- “I am calm and relaxed”
- “Focus on the process”
- “The how is in the now”
- “Trade by trade”
- “I am alert and prepared”
- “Anything can happen”
- “Anything is possible”
- “Control the controllables”
- “Tune in”
You can create your own performance cues using these examples as inspiration or you can just go with them directly.
It’s important to attach each performance que to a particular situation. For example, when entering a trade using the que saying “Anything can happen”will help you create a state that accepts losses and allows you to avoid hesitation on the next trade.
5. Identifying your Ideal Trading State how to access it
Once you have mastered the strategy of identifying your ideal trading state your trading will be changed forever. This is obviously a personal thing and we can’t tell you what your ideal state is but we can help you see the importance of working on this and identifying it for your future success.
You need to really spend some time thinking about what your ideal trading state is, how you will create it, what you’re ideal physiology is for successful trading and the thoughts and focus that gets you into that zone.
These are the three very important items you need to be focussing on:
- Your physiology.
- Your thoughts and self-talk.
- Your focus.
The reason we have included all the other strategies is so that you can go through them all and find the combinations that work best for you. Everyone will react slightly differently so it’s important that you experiment with these.
6. Tapping into your Awareness
Tapping into your awareness means that you are keeping tabs on your emotional state. You need to notice how you are feeling in this moment and then use the following 5 questions to help create the best states for yourself.
- How resourceful of a state am I in?
- Where is my energy level?
- What is my physiology like?
- What am I focused on right now?
- What and how am I thinking?
As you answer these questions make any adjustments that may be necessary to create the state or the feeling that you desire right now. If during the trading day you experience negative emotions you need to stop and take a time out and review the above 5 questions or do whatever you need to do to get rid of all negative thinking.
As you go through the 5 questions pay attention to how you created the negative state for yourself. It’s a very interesting exercise to ask yourself what the meaning behind the negative emotion was. For example, a feeling of anxiety when entering a trade may mean that you are entering the trade for the wrong reasons and your unconscious mind is telling you this by creating the feeling of anxiety. Your unconscious mind knows when you are violating your own rules.
The process for tapping into your awareness is as follows:
- Ask yourself the 5 questions.
- Then ask yourself if you are in the right frame of mind to trade effectively.
- Finally, give yourself a score from 1 to 10 for how close you are to your ideal state for trading. 1 being totally not resourceful and 10 being in your perfect trading state.
Over time this exercise will really help you to tune into your state and assess whether or not you need to change that state or simply avoid trading altogether.
The best part of doing this exercise is that over time, as with all of these strategies, the more you practice them the more automatic they will become.
7. Creating a Peak Performance Trigger
In trading, along with any performance-oriented activity, it’s quite possible to create something called “triggers”. These triggers will enable you to enter your ideal trading state on Que. This is done through something called neurolinguistic programming or NLP for short.
The concept of creating a trigger is known as anchoring. Anchoring is the process of stimulus-response conditioning or creating a very specific response to a pre-determined stimulus. The interesting thing about this strategy is that every one of us already has many varieties of anchors built into our minds. Some of these anchors are empowering while others work against us and our desires. These have all been developed unconsciously over time from the environments that you place yourself in regularly.
Trigger Example: To illustrate a trigger, think of the smell of certain perfumes, certain objects, the sound of a whistle, a school bell, or the sight of a red traffic light. A trigger could come from literally any stimulus from your environment. All of these are specific stimulus that triggers certain feelings or actions which occur automatically.
To create these triggers manually follow this 4-step process:
- Remember a time that you had a feeling or state that you want to create now. Fully return to that time now. See what you saw, hear what you heard, and feel how good you felt. If you cannot remember such a time then simply imagine how much better you will trade if you were confident, focused, calm, and positive.
- As you keep going through this memory make the colours bigger, brighter and richer, make the sounds louder, and the feelings stronger.
- As you feel these good feelings squeeze your thumb and middle finger of either hand together.
- Still holding your thumb and middle finger together think about a situation coming up hours from now during which you want to experience this state. Imagine the things that you are going to do working perfectly and exactly the way you want. See what you will see, hear what you will hear, and know how good it will feel.
Keep this routine up and remember the importance of practice and repetition for the whole process. Eventually, you will be able to recall this state at any time simply by pressing your thumb and your middle finger together which will allow the positive feelings to come flooding back.
There is a ton of material about anchoring and NLP on the internet. There are many great courses that are designed to create these things within you. If you are interested further then do a quick Google search and see if there is anything that interests you.
8. Ask yourself Resourceful Questions
The reason asking yourself resourceful questions helps is that your experience and state are strongly affected by the quality of the questions you ask yourself. Imagine a trader having a tough time asking himself “Why am I trading like an idiot?” or “Why did I take that stupid trade?” What information do you think he will uncover from asking these negatively charged questions? What if instead, he asked “What do I need to do to trade more effectively?” or “How will I trade more effectively tomorrow?”
Asking quality questions on a regular basis can have a significant impact on your personal state.
Here are some examples of high-quality questions:
- What am I grateful for today?
- How will I trade well today?
- What is going well for me?
- What am I happy about today?
- How will I develop my trading ability?
All of these questions begin with a how or what. In psychology, the most powerful questions always start with how or what. Asking yourself how or what questions stimulates your brain to look for answers. If the question is positive, then your brain is stimulated to look for positive things. You absolutely need to be in a positive state when trading otherwise you put yourself in a situation where you might not make the best decisions.
9. How Winners Handle Losing
To give us a good understanding of the attitude of winners we can look at a quote from a late 90’s baseball movie called Bull Durham.
“Sometimes you win, sometimes you lose, and sometimes it rains”
That’s just the way it is in trading. Winning traders accept losses as a perfectly normal part of trading. A trader with a winning attitude will generally go through a specific thought process after a loss. We will now quantify this thought process into a strategy that you can use to handle losses much more effectively.
Let’s start by looking at the thought process of a winner:
- Winning traders fully accept the loss and the general nature of trading which involves losses from time to time.
- They always keep the perspective of the bigger picture in mind.
- They understand that there are valuable lessons to be learned from every trade. This means that there is no failure, there is only feedback.
- They review their trade from a third-party perspective.
- They put losing trades behind them and move on.
- They do not equate losing trades to them being a losing trader.
So the next obvious question is; how do we create a strategy from this knowledge?
There is a 4 step plan of action that you can implement in order to specifically help you handle losing trades. This is called the ARIA method.
- A Stands for acknowledge: You acknowledge that the trade did not turn out how you wanted or expected.
- R Stands for release: You release it by noting the feedback from the trade and then throwing that trade away.
- I Stands for Imprint: You imprint onto your brain the ideal outcome that you would have preferred to see by mentally rehearsing how this would have played out.
- A Stands for Affirm: You do this by telling yourself this is what you will do next time.
This is a nice simple way to deal with a loss. It may not feel natural at first but with time it will become more automatic and easier to let go of losses.
Another good quote for new traders to internalize is from the world-famous basketball player Michal Jordan. He said:
“I’ve missed over 9,000 shots in my career, I’ve lost over 300 games, 26 times I’ve been trusted to make the game-winning shot and missed, I have failed over and over again in my life and that is why I succeed”
This quote sums up the entire principle behind a winner's success and a loser's failure. This is something that you must believe if you are going to become a successful trader. You will lose and you will fail but if you keep practicing and applying the correct training to your game then you will eventually become a great trader. This is also what separates traders that have been trading for ten years from the traders that give up and fail. The trader that has been trading successfully for a long time is still doing so because he was able to accept losses, learn from them, and not allow that previous loss to affect the next trade.
10. Regaining Focus
Up to this point, we have looked at how to create certain states that are ideal for peak performance. However, it’s a fact of life that even a successful winning trader will lose focus now and again. This strategy will show you how to regain your focus in these situations.
Everyone loses focus but what makes the winning trader great is that they can get their focus back quickly while minimizing disruption to their performance. As a trader, it's really important that you have a refocusing strategy.
The first step is to be self-aware. You need to be self-aware of when you have lost or are losing focus and concentration. A very useful thing to do is to monitor your performance level on a scale of 1 to 10. 10 is your ideal trading state while 1 is you are totally in the wrong frame of mind to even think about trading.
If you need a quick refocus then sometimes a simple performance que will do the trick. Other times you may be completely distracted or unfocussed and in an un-resourceful state. In these times a time out away from your trading platform is probably the best idea. There are times when you are emotionally compromised so much that you simply need to stop what you are doing and remove yourself from the situation entirely.
Using some of the strategies that we have already looked at try this refocussing routine:
- First, get away from the computer and take a break.
- Review your performance. What was the feedback, what did you learn, and what should you do differently next time? When you do this be objective by imagining what your trading coach would say if he or she was watching you.
- Do a breathing exercise to center and refocus yourself.
- Refocus by using a performance que or by thinking about your process goals.
- Visualise yourself trading successfully by implementing your cues and carrying out your process.
This is actually a very good strategy even for already successful traders. The key is that you bring yourself to a self-aware state and regain control over your mind.
11. Managing Risks
Managing risk is probably one of the areas where new traders make the most mistakes and get totally burned on. What new traders fail to realize is the interrelationship between trading risks and their trading psychology.
An example of this and one of the quickest ways to create an un-resourceful state is by taking excessive amounts of risk that you are not comfortable with. This could be taking on a trade size with a tick value that is far more than your trading psychology is comfortable with. It takes plenty of time and practice to get up to higher trade sizes.
Earlier we looked at the concept of matching your challenge with your capabilities in order to ensure you can enter the zone effectively. What is really interesting is that taking on too much risk is the one thing that will directly stop you from entering the zone.
Taking on too much risk for your current trading abilities will alter your state negatively. This will in turn result in negative performance. This performance will be far lower than what your actual potential is because you forced yourself into a situation where you were not comfortable.
Think about how you would feel if you had placed a trade where each pip is worth $0.10. Let’s say that your account balance is currently $10,000 in this example. Now imagine how you would feel if the price went against you 2 pips, then 5 pips, then 10 pips, as you wait for the trade to work out in your favour? Think about this for a second. For most people, this small amount of risk would not faze them too much because even a 100 pip move against their position would only result in a $10 loss on a $10,000 account. Taking a loss of 0.1% would be no problem for most people.
Now imagine the exact same trade scenario but this time each pip is worth $100. How are you feeling now? How would you feel if the price went against you 2 pips, then 5 pips, then 10 pips, as you wait for the trade to work out in your favour? How does this make you feel about the trade now? I’m willing to bet you would feel much more overwhelmed by the second example. If the price moved 100 pips against you this means that you would have a loss of $10,000 and would effectively blown out your entire account.
As you can see from this example the emotions are completely different. As the price runs against you in the second example you will most likely be more inclined to close the trade just in case it keeps going against you and wipes out your entire account. A move of 100 pips against your position would in fact wipe out your entire trading account. This is way too much negative pressure that you are forcing on yourself in this situation. But the sad fact is that a lot of retail traders tend to do exactly this kind of thing because they are trying to change their financial situation quickly.
In the first scenario, you were probably not even concerned about the small losses relative to your account balance. You are still process focused on the reasons you entered the trade in the first place which maintains your conviction in the position. This conviction will allow you to comfortably hold through the temporary drawdown and wait for the price to come back to a point where you can bank a nice profit.
This illustration sums up why and how risk influences your psychology. It also highlights how the further apart your challenge is from your current capabilities the less likely you are to perform well and make a profit. This is why it’s important to not hinder your performance by risking more than your current capability allows for.
If you just stick it out in the beginning and perform risk management responsibly you will be able to get to a point where you are capable of bumping up your size in a controlled and sustainable manner. That is how real professionals do it. trading is not about changing your financial situation instantly. It's about gradually increasing your skill and performance in a way that will comfortably allow you to bump up your trade sizes gradually.
Think of your physiology as a set of clothes that you are wearing. You probably have clothes that you wear for certain situations such as going to the gym, chilling out at home, or looking good and going out for the evening with friends. Each of these outfits creates a certain feeling or intention when you put them on. Likewise, you also have specific physiological outfits that create certain intentions.
By recognizing which physiological outfits you need in order to achieve a specific state you can then adopt or wear that physiology in order to access your desired state.
Think in terms of the following items in order to understand how to change your physiology:
- Your posture.
- Your breathing.
- The speed of your heart rate.
- The kinds of gestures you make.
- Positive or negative facial expressions.
- Muscle tension and where that might manifest itself in your body.
Changing these from negative to positive will change your physiology and your mindset for the better. For example, if you are frowning, have your arms crossed and slouching over your keyboard while breathing shallowly there is no doubt that your physiology is not empowering you to perform at your peak potential. However, if you sit up straight, put a smile on your face, and breathe deeply and purposefully from your lower abdomen then this will be a much better physiological state for better trading performance.
This is one of the most effective ways to change your state especially when you make the changes positively charged. If you are slouched over at your desk then sit up straight and put a smile on your face. Make your physiology positive and it will filter through to your mind which in turn will allow you to perform better.
13. Beliefs, Attitudes, and Perceptions
Your beliefs will directly allow you to or simply stop you from entering the zone. This is because your beliefs, attitudes, and perceptions have a direct impact on your state, and as an extension of this, the way you will behave in the markets as well.
If you are continuously experiencing negative states you could potentially be holding your trading performance back. This could be due to many things such as self-limiting beliefs that you may have, an un-resourceful attitude, or even a negative perception about trading because you are not happy with your performance.
Look at proven examples of people that have actually achieved what you are trying to achieve in order to positively change any potential self-limiting beliefs you may have. Do this to prove to yourself that your goals are possible and that you can achieve them if you follow the same training and the same focus as the proven successful person.
There are many great self-motivational programs or courses available from some very well-known self-help gurus. Anthony Robbins comes to mind and is a good place to start looking into motivational tactics that might help not only with trading but also with your life in general. If you have poor beliefs then it might be worth investing in some training to help with that. It never hurts to continue to try and improve in all facets of your life, not just in trading.
Regardless of the statistics that you may have heard there are successful traders and you can become one of them if you put in the work using the correct training.
14. The Power of Mental Rehearsal
Mental rehearsal is the process of imagining yourself trading well. This means that you are visualizing this over and over again until you actually see it as your normal self.
A good idea is to mentally rehearse your process goals. For example, seeing yourself trading well and implementing your trade plan works very powerfully because visualizing provides a much stronger focus for your mind instead of simply telling it something.
Mental rehearsal is one of the most common strategies used by successful performers in all types of sports and industries and has been proven in numerous scientific studies to be a vital factor when preparing for a successful outcome.
One thing to keep in mind is that science has proven that your brain cannot distinguish between something that has actually happened and something that you have vividly imagined over and over. Isn't that interesting? This is why the best sports athletes in the world use visualization and mental rehearsal exercises as a normal part of their training. It works, but like anything else, it takes time and practice to become really good at it.
The most powerful feature of mental rehearsal is that it allows you to literally program your desired behaviours right into your subconscious mind. You can do this because your subconscious mind operates best in visual imagery.
When you are mentally rehearsing try and see things with your own eyes as if it was happening for real in the present tense. See it, hear it, feel yourself trading well, let the images be big bright and colourful and always keep it positive.
When trying to master mental rehearsal keep in mind the 4 R's of mental imagery:
- Relaxation: a relaxed mind and body will help you to experience any emotions generated. It can help to use relaxation techniques prior to imagery training.
- Realism: make your imagery realistic so you can actually believe you are executing your skills in real-time.
- Regularity: spending between 3 and 5 minutes on imagery per session seems to be most effective with 10-15 minutes each day.
- Reinforcement: writing imagery scripts will help you plan the content and timing of your imagery training. This can really help reinforce what you are trying to accomplish with the mental imagery.
Take some time to incorporate these items into your trading until it becomes an automatic process that your mind carries out.
Introduction to Trading Psychology Summary
Let’s now remind ourselves what we have covered up to this point so that you can formulate a clear plan and manage your trading psychology in a way that gets you in the zone to help create the emotional states that will lead you to success.
First of all, we looked at how all of our emotional states are dynamic processes that change constantly throughout the day.
Next, we discovered how emotional states are what drive our feelings and ultimately how we perform. Some of these states are good for peak performance and others actually work against us.
Energy management is just as important as psychological elements. You need to use the information and exercises here to actively identify your personal ideal state for trading. You then need to learn how to create that ideal state which will enable you to get into that state quickly and easily when you need it.
Being aware of your state is equally important, particularly so that you are instantly aware of when you are in the wrong state for trading. We then learned how we can create triggers and anchors to access peak performance on que.
We learned about negative states that affect us while we are trading which include:
These negative states affect our perception which affects our ability to spot an opportunity, our overall thought process, and narrows our attention. Every single state, good or bad, is influenced by our own beliefs, perceptions, and attitudes.
Managing your states can be both proactive and reactive. Performing to your potential is directly influenced by how many interferences you experience. Remember that at any one moment you are performing at your potential minus any interference. Getting into the zone is the perfect state that you want to get into for trading.
Several things can influence you from getting into the zone which includes:
- Your level of skill
- Your ability
- How much enjoyment you get out of the task
- Control over performance
- The feedback available
- The beliefs that you have.
Training and practice of the correct methods is the first starting point, followed by working on your inner game using the techniques outlined in this section.
Interestingly, thinking about getting into the zone will actually stop you from getting there because “trying too hard” moves you away from the natural state of the zone. It all has to be unconscious and natural which takes time and practice to achieve.
Positive states such as concentration are created by things such as physiology, thoughts, self-talk, and what you choose to focus on. Changing any of these things, positively or negatively, will directly affect the state that you are in.
The key techniques for creating and sustaining positive states are as follows:
- Positive physiology.
- Utilizing sound energy management techniques.
- Centering techniques.
- Focus on the task and the process in the present tense on a trade-by-trade basis.
- Your thoughts, keep these minimal by using simple performance cues rather than overthinking things too much.
Interferences are one of your biggest enemies when trying to perform to your potential.
There are two types of interference that you need to avoid:
- External Interference: Items such as cell phones, instant messaging programs, social media, email, people, and software games.
- Internal Interference: Items such as negative self-talk, hunger, dehydration, and tiredness.
We then looked at how winners handle losses and the fact that they fully accept losses as part of the nature of trading. Winners keep their perspective of the bigger picture in mind, gain feedback from every trade they take, and review their trades from a third-party perspective. They also put losing trades behind them and move on using the ARIA method. They also separate losing trades from them being losers themselves.
Finally, once you have mastered these other items you will need to have the ability to re-focus from time to time. You know how to get into the zone but when you lose that focus you will need to have a strategy to get back in the zone. To do this we gauge our awareness on a scale of 1 to 10. We then use the performance cues and take regular time outs when needed.
Before we complete this section we are going to leave you with some suggested follow-up tasks that you can take away and practice in your own time.
First of all, remain aware of your own state, check it on a 1 to 10 scale, and identify what states are perfect for you to personally perform to your potential. Practice and explore your own strategies for managing your emotional state, especially in terms of your ideal trading state.
Finally, add some of these strategies into your daily routine so that you can begin automating the entire process of entering the zone. It doesn’t have to be all of the strategies, just something that gets you into a rhythm.
As was mentioned at the beginning of this section, trading psychology is a huge subject and something that will make up a large part of your trading. This section has hopefully given you a good grounding in the overall principles so that you are ready for upcoming sections.
Advanced Trading Psychology
Welcome to this section on advanced your trading psychology. Trading psychology is one of the most important elements of your overall trading process once you have acquired the correct training, experience, and skills.
The initial stages of trading are learning the correct skills in the first place because incorrect learning is like trying to play golf using a hockey stick. No matter how hard you practice you will never be a good golfer.
The first stage is to study all about what drives the markets and how you can plan and execute your trades using the same skillset that institutional traders use. This is the equivalent of learning the correct swing and stance and what clubs and balls you should be using as a starting point for learning the sport of golf.
After this, from that moment on your development is all about 2 things:
- Your psychological approach to performing.
What we will do in this section is take you through all the major psychological concepts that will be key to trading successfully so that you can begin setting up these processes into your routine until eventually, they become your natural trading habits.
A trained trader who is performing badly does not necessarily need to learn new skills or find a better strategy; they simply need to hone their psychology to improve their overall performance.
Once a trader has practiced the correct skills and developed them to a point where they can compete then their number one priority is to ensure that they are trading in the zone whenever they are in the markets. Getting into the zone is the absolute key to trading successfully. This is also the reason that banks, institutional trading firms, and funds spend thousands of dollars coaching their traders in this manner.
Conviction in your Trading
Conviction goes beyond just thinking that you might have a good trade plan. True conviction in your trading comes from practice and experience of being successful over a sustained period of time with your edge.
For new traders, conviction doesn’t happen overnight. If you want to be successful as a trader then you will need to understand and accept that making money will only come when you have gained enough experience following your edge over a long enough period of time.
How to Build Conviction
There are a few really solid ways to help you gain conviction with your trading. The list that we are going to present here is by no means the only way to gain conviction and you should experiment with what works best for you to keep you on track. The one thing that we will point out here is that lack of conviction always has its roots in poor trading psychology. We have prepared process oriented ways to help build conviction which we have seen many traders benefit from. If you find after trying out our suggestions that you are still experiencing issues with conviction you might want to go on a mission of self-discovery through psychological training to see what makes you tick and why you do the things that you do.
Human beings are very interesting creatures and understanding all the various things that make us do what we do can be a very eye-opening process that will not only point out some of the bad habits that you may have had in trading but also in many other areas of your life as well.
Stop Risking your Money
If you are already an active trader one of the quickest ways to stop the constant stress and start building conviction is to stop trading a live account and start trading on a demo account. Demo accounts will never be a completely accurate way to judge your trading skills but at the very least you can take a bit of the emotional burden off your shoulders and just practice the processes of trading.
There is always a lot of debate on whether traders should use a demo account or a live account when learning to trade. The argument is that a demo account is not an exact replication of the true market environment and that you will not come to gain the same level of psychological understanding as you would with trading on a live money account. And to this argument, we would completely agree. However, we are more concerned with the trader learning the correct process of trading which we think is far easier to do on a demo account that removes a lot of the pressure to perform. The choice, is of course, up to you whether you want to learn to trade on a demo or a live account but we suggest that if you must trade a live account please do it with a small amount of money that you are comfortable losing. There is nothing more devastating than making a simple mistake and wiping out a sizable live account.
Understanding and practicing the correct process of trading is by far more important than simply trading on a live account. If your process of trading is not any good and you never stick to your methodology or trading edge the way it was designed then you’re only going to cause damage to both your account balance and your trading psychology. This is obviously not the best way to set yourself up for success.
It’s also worth noting that it’s really easy to develop bad habits in trading. If you start off your trading career with the terrible habit of not sticking to your trading edge or plan then it’s obvious that you won’t gain any real conviction in your trading because you have no way to quantify the results you are getting. How can you quantify or have confidence in a trading edge that you execute differently every time giving you results that you can’t statistically track or even understand? We see this all the time with so many different traders and we can say that people who start off with these bad habits have an incredibly difficult time readjusting to proper habits.
You need to be able to trade freely without any negative or volatile emotions. trading on a demo account will allow you to trade in and out of the markets making decisions based on analysis and logic rather than limiting emotions or misguided gut instincts. If you are an unprofitable trader with poor trading habits your gut instincts will not serve you in any way other than to remove you from your money. Gut instincts will only serve you as a trader if you have been profitable for a long period of time and have seen many different market environments from which to draw your gut instincts from.
Once you have mastered the process of trading correctly on a demo account you may then choose to start back on a live account. We would suggest starting with a small amount of money until you are comfortable. Once you are comfortable and you have maintained your high level of conviction you can then bump up the amount of capital you have slowly so that you don’t put too much pressure or emotional strain on yourself.
Start Trading with Small Amounts of Money and Build Up Slowly
When you are fully confident that you can make money consistently from trading with your well-planned and executed edge then it is time for you to trade a live real money account. This is the time that you simply continue to execute your trade plan exactly the same way we were on the demo account. Try not to put any pressure on yourself to perform, just keep the process of trading nice and simple.
Start small and add more funds to your account gradually so that the added pressures of risking slightly more money are never an issue that might start to bring back bad habits. When you put too much pressure on yourself in the heat of battle your brain will sink to the level of your training. Think about that last sentence for a moment. In the heat of battle, your brain will sink to the level of your training is so true in all areas of your life. If you have trained like a prize fighter then you will be just fine but if your training was rushed and full of holes then you will start to experience the old issues that previously plagued your trading efforts. How much effort you put into your training is up to you but know that it is your choice how much you train and your results will reflect your level of training and effort directly.
Let’s look at an example of someone who has $100,000 to invest in their trading business. If you have $100,000 to invest in your trading then starting with a number like $10,000 is a decent idea. You would then trade this amount until you are comfortable and consistently profitable for a couple of months. If, you find that $10,000 is too much and you start to see bad habits creeping in then withdraw half of the money and see if that fixes the issues. Once you are comfortable then gradually start increasing the size by $10,000 or whatever amount you are comfortable with, every couple of months until you are fully invested and completely comfortable and profitable with trading the full $100,000.
Doing this in a gradual manner doesn’t put too much emotional strain on you and will increase your odds of success over the long run.
This process could possibly take a long time. And you know what? That’s totally fine. You are investing in your future and preparing yourself and this makes you a true professional who stands a much better chance of succeeding over the long run compared to those many people who will come to the markets with their guns blazing. Just like in a gunfight their career as traders is typically over quickly. Again, all things worth having don’t come easy!
Remember to not measure your success as a trader based solely on how much money you make at the end of the day, week, or month. In the beginning of your career, you should consider it a major victory if you are losing less each month. For example, if you lost 10% in your first month of trading but in the second month you only lost 5% then that is a victory worth celebrating because that is a real measurable improvement. The point is to have a trend moving toward profitability through your well-thought-out edge and solid trading practices.
How One Trader Increased Trading Size
Before we move on to the next suggestion to help with your conviction we are going to share a story of how one trader increased his trading size when he first started out as a trader. The name of the trader is unimportant but we will let him write in his own words, just try to take an understanding of the process he went through.
Back in 2006, I started out as a proprietary day trader at a company that had about 2,500 traders globally. I was only trading US equities such as NASDAQ and NYSE-listed stocks which meant that I was trading shares at that time.
As a new trainee, I was only allowed to trade with the smallest share lot allowed which was 100 shares at any time and was given access to $50,000 of company funds to trade. I quickly discovered that I wasn’t a fan of losses even if it was only a dollar or two each time. So I learned to become the champion of getting in and out with breakeven trades on most of my trades. Soon after I was able to put some winning trades together and started to turn a net profit each day.
At the end of my first month, I was net profitable and had my share size increased to 300 and given $100,000 of company funds to trade. In the next couple of months, I continued to increase my share size and my profitability which meant that I was continuing to get more and more company funds to trade.
When I finally got my position size up to 900 shares while still maintaining profitability I found the psychological number of 1,000 shares to be really intimidating. It was the first time that I finally felt truly uncomfortable with the trade size and the monetary value of the positions I was taking.
It took me several days to pump myself up and one faithful Wednesday afternoon that I will always remember I finally got the courage after a couple of cheeky lunchtime drinks to take my first 1,000 share position. My target stock was Blockbusters. For those of you that do not know what Blockbuster was, it was a store where you go to in person and actually rent a hard copy of movies you wished to watch. That’s pretty hard to imagine with all the streaming technologies we have today but this shows my age I guess.
I sat at my desk, found my trade setup, and stalked it waiting for the right moment to strike. My heart was pumping hard, adrenaline running through my veins, and my hands were shaking badly but none of that was going to stop me from improving my game and making some cash. Then the setup triggered and I typed in 1,000 shares and hit my buy key with all the courage I could muster.
These days I look back at what happened next as comical but at the time it was anything but. It was a day that defined a new explosive profitability in my trading.
Within a fraction of a second after hitting my buy key the stock absolutely exploded! What was normally a pretty tame stock was now whipping around wildly. A box popped up on my screen that said “daily maximum loss exceeded, your account is locked to close positions only ”. I had no idea what had happened, I was panicking, and I never saw that message before. I immediately started sweating, then literally yelling at my screen like a child, I was completely blind, my entire intellect shut down and I was terrified.
Finally, I noticed my profit and loss blotter swinging up and down $500 per second. I had no idea what was going on. My best full trading day up to that point was around $300 so seeing these massive swings was gut-wrenching. I thought my dream of being a trader was dead right then and there. Then I hear one of the other traders that had come over to watch the spectacle I was creating say “Yo B you have 20,000 shares!” I looked down and the truth of what happened was now completely and utterly apparent. I caused the stock to explode with my massive buy order which was way more than that stock was used to seeing. I was so unable to handle the situation that I punched a hole right through the cheap Ikea desk I was sitting at then let a few choice words flow out of my mouth that I will not write here.
As the story turns out my nerves got the best of me. My hands were so shaky that instead of typing in 1,000 shares I actually typed in 10,000. Then to make matters even worse I double-tapped the buy button. Ask and you shall receive, send a market order for 20,000 shares and 20,000 shares you shall receive! The stock never really had more than 3,000 to 5,000 shares per price level so 20,000 shares wiped out a lot of price levels.
When the dust had settled I actually wound up making around $800 on that trade and it was off to the pub to celebrate a new milestone in my trading career of finally being able to conquer the 1,000 share number. And conquer I did! Even though it was a complete disaster and mistake on my part, it projected me so far through my "terror barrier" that the very next day I was batting around 5,000 shares like it was nothing. And within 2 months from that moment, I was consistently one of the top 5 daily performers in terms of overall profits within a global company of 2,500 professional traders.
In the trading world, we call this sort of event a “Fat Finger” move. Even though it wasn’t a billion-dollar mistake that we read about in the news it was still the point in my career that I earmark as one of the most important moments in shaping the next 5 years of my prop trading career.
Assess your performance each month
It’s important to keep your eyes on the ultimate prize and learn to trade consistently over months rather than days or hours. At the end of each month, it should be your goal to lose less than you did the previous month, gradually improving your trading results until you are breaking even and then making a profit.
Assessing your performance on a monthly basis can highlight some fairly basic problems that may be shrinking your profits or causing you losses. It would also be helpful to set up your performance in a simple-to-read spreadsheet that you can share with other traders and get some useful insight that you may not have thought of on your own. Once you know this valuable information then you can make a plan on how to rid yourself of these problems and turn the situation around to start making better trades. Remember, it’s about the process of trading first and the profits second.
A good way to make life easy when tracking your trading results is to have a spreadsheet or written paper that tracks all of your trades for the month. You can track things such as what your initial target and stop losses were at the time of the trade and then compare what the actual results were and why you made the decisions that you did. You can write out how you were feeling before, during, and after the trade to see if you have nagging issues that you might need to address and fix.
Don’t get too carried away with tracking every single tiny piece of data in your trading. Just focus on the major items that you can work on and make a plan to improve your overall results.
There is no right or wrong answer for how long it should take you to become consistently profitable. We would argue that it is more about the quality time you spend with the market trading with the correct principles than about how much time you spend in front of your trading screens. Quality over quantity as they say. We would rather invest in a trader that has only been trading for a year but has proven that the way he traded was in a professional manner than some trader that has been trading for ten years and still can’t make a profit year over year. The chances are that the ten-year trader has more bad habits than can be fixed and probably doesn’t want to fix them because he is stuck in his ways. The quality trader will always beat out the quantity trader every time.
Focus on Fundamentals and Sentiment
In order to have any chance of becoming a great success in the Forex market you absolutely need to change your reliance on technical strategies, indicators, trading robots, or any strategy that involves simply staring at a price chart for a trading signal. This is not to say that you shouldn’t use any Technical Analysis. Professional traders definitely do use technicals but with a mix of 80-20 or 90-10 fundamentals to technicals being the more appropriate ratio for successful trading. Other markets such as stocks, bonds, futures, etc also rely on understanding the fundamentals and sentiment situation.
It is important to stay tuned in to the live news feeds to keep up to date on what is happening with the current fundamental and the sentiment situation of each currency that you plan on trading. Don’t worry if you don’t know what the fundamentals and the sentiment are at this point. We will devote a great amount of time and effort to help you understand these concepts in other Wikis. For now, we just want you to be aware that understanding these two concepts can have a radically positive impact on your trading psychology because they are what is causing currencies to move and you always want to be on the right side of the professional market.
Trader Psychology Problems
Whether you win or lose in trading, at least 80% of the final results you get are the result of your psychology. trading is a huge undertaking and the reason most people fail is because of poor trading psychology. They simply approach the markets or have beliefs about what is possible in the markets that are completely false.
The real reason that traders have poor psychology is mainly that they lack complete conviction in their trading methods. Conviction is directly related to how confident you are while in a position. Knowing the reasons why you are in a trade is vital to staying calm if the market moves against you.
One of the main aims of trading is for the trader to gain complete conviction in his trading so that he will never suffer from any psychological ailment with his trading. In trading it is never the psychology that is the problem, it is the conviction. Conviction, or lack of conviction, is the root of all good or bad trading psychology.
Switching is where you have a strategy, trade it and it doesn’t really work so you decide to switch it and go find a new strategy. This process repeats until your library is full of trading courses and systems.
Each and every strategy that you were sold tells you that this is the last strategy you will need and it has everything you need to become successful in the market. You quickly realize that the system is not that simple and move your search to the next latest and greatest product that will surely make you rich.
This cycle locks you into a constant stream of losing strategy after losing strategy so it will be impossible to ever make consistent profits in the markets. Even worse is that some of these systems might be decent but you never give them a chance to prove themselves. The effectiveness of any trading strategy should be measured over hundreds of trades, not a handful.
Overleveraging is risking too much of your account equity before you become consistently profitable. The root cause of overleveraging is either lack of conviction, misguided overconfidence, or just not knowing what you’re doing.
A lack of conviction usually stems from not having enough faith in your trade plan or your trading edge. This could be for many reasons but the most common is a lack of experience executing trades in accordance with your trade plan. This may cause you to take trades that are not in line with your edge.
Not having an edge typically leads to losses and losses make a trader who has poor psychology tend to load up on trade size to try and make back all the losses on one trade. This type of behaviour might work once or twice if you are lucky but over the long run you will blow out your account.
Misguided overconfidence can happen to traders who don’t have a lot of experience having consistent winning streaks. If a novice trader has a nice winning streak his confidence seems to go up and he becomes overconfident. Overconfidence comes from the recency bias of having some nice wins in a row and the other major problem of overleveraging.
The trader gets overconfident and starts taking on larger trade sizes believing that he is invincible. As with all things in life, “A fool and his money are soon departed.” Remember before when we talked about the market's sole purpose is to remove you from your money? Well, when you overleverage you make it all that much easier for the market to take your money.
The trader may have a couple more wins as the trade size gets bigger and bigger but what almost always happens is that one trade will get away from the trader and he ultimately gives back all his prior profits and then probably most of his account balance. This is obviously a tough way to make a living which is why professional traders go for single base hits rather than swinging for grand slams on every trade.
A trader that just "doesn’t know what they don’t know" is one that should step off onto the sidelines until they have a better understanding of how to trade in a professional manner.
Sometimes traders will overleverage, not because they want to, but because they simply don’t know how to use their trading platform. Most brokers offer demo platforms where you can risk fake money in the markets. This is a great place for novice traders to learn how to use the trading tools the platform provides before they go out and risk real money in the market.
As human beings, we are psychologically affected by our most recent events. In trading terms, an example would be that you could have had 30 winning trades in a row and then experience a losing streak of 3 trades. There could be nothing wrong with this system but the last 3 losing trades will have more of an effect on your psychology than the previous 30 winners. You would be focusing on the most recent trades in your mind. The 30 winning trades should clearly outweigh the 3 losing trades but the human brain will focus on the most recent events.
Recency bias can work the other way as well. Maybe you have had an incredible winning streak and your confidence is running high so you decide to double up the size of your next trade. The thinking is that you might as well make some more money while you are on a hot streak.
This overconfidence has led you into the overleveraging trap and at some point, you are going to have a losing trade. If the trade size is much larger than usual, the loss will also be greater than usual and can have devastating consequences both financially and psychologically on the trader.
Traders need to be careful to not allow the recency bias to cloud their good trading judgement. You can’t let the last trade affect the next trade whether it was a winning or losing trade. This recency bias could lead the trader down a path of switching systems even though the system they are using is perfectly suitable.
Solutions for Trading Psychology Problems
If you want to be a successful trader then you absolutely must learn what is prices using some form of Fundamental Analysis. Fundamental Analysis and Sentiment Analysis are what drive almost all currency movement. Fundamental or Sentiment driven markets can happen for a variety of reasons which are more fully covered in the Wikis on Fundamental Analysis and Sentiment Analysis.
One thing to note here is that there are very rare times when the market does drive price purely on the technicals or price action. This does not happen very often but the only times that the market would do this is at a time when there is absolutely nothing happening for the market to focus on. This tends to happen on a Monday after a Friday holiday when there is no economic data that has been released to affect the market and nothing for the market to look forward to either. The market is devoid of any geo-political events or any other fundamental issue to focus on. It is in these times that the market might go technical for its trading but you also have to note that this will likely be a very low liquidity environment which is something that can pose risks to traders and their strategies.
Retail traders tend to learn about Technical Analysis first because of the massive amount of technical courses being pedalled on the internet. They are sold on the idea of getting rich quickly and easily. But we can’t lay blame on these retail traders because this is the only thing they can find on their own and who could really blame them for wanting to make a lot of money in a short amount of time?
If you were able to ask any of the biggest currency traders in the world what indicators he or she uses to make their trade decisions you would get answers like forward guidance, inflation, interest rate policies, jobs reports, etc. You probably would not hear any of the brightest, biggest, and best traders in the world say that they make their trading decisions based on the long stochastic being oversold combined with a crossover of the 8 EMA over the 21 DMA, but only if the RSI has turned positive and the MACD Histogram is above the 0 line. That kind of trading system is reserved for novice retail traders who have never nor will ever make money consistently in the financial market.
There are some technical systems that may work from time to time but wouldn’t it be smarter to focus on exactly what the masters of the financial universe focus on? Economics and fundamentals are not sexy and easy to sell like technicals are but they work when applied correctly. We are all here to make money so we should all focus on the things that will best support this goal.
Relying on complicated Technical Analysis alone will likely never get you anywhere. The financial markets move because of the actions that central banks take in order to achieve their inflation and policy mandates. Expectations of what the [h[Central_banks | central bank]] will do next are also high on the list of what moves the financial markets, especially the Forex markets. Mix that with market sentiment and you will trade much easier and more profitably with a higher degree of accuracy.
As traders, we must continually learn what is currently driving the current price of a particular currency pair. Having knowledge of how the market operates is essential in order to make sense of the vast amount of information that is thrown at you every single day. Having a solid foundation of the correct education is essential for you to be able to pick out the relevant information that you can use to pull profits out of the market on a daily basis.
For most markets, the correct knowledge to gain would be around what the fundamental and sentiment reasons are for price to be doing what it is currently doing.
Knowledge can be a double-edged sword if you are not careful. On one hand, it’s great to have lots of information so that you understand the broad scope of the market structure. On the other hand, you will need to be careful not to fall into the trap of analysis paralysis. Your job will be to have enough information to make intelligent trading decisions but not to allow too much information to keep you from making trades. With all things in life, this will be a balance that you will have to find and that is something that will be different for every person.
Conviction is confidence and the best way to build confidence is to succeed at something consistently over a sustained period of time. Once you have complete conviction in your trading all your trading psychological problems will dissipate.
You build conviction by focusing on the fundamentals and sentiment situation of the current market conditions. Assess your performance each month and then build a plan to make next month even better. This will be critical, especially in the beginning stages of your trading development. Then you need to make sure that you don’t stress yourself out by starting your trading career by putting all your capital at risk before you have had a chance to learn enough to keep you out of trouble.
We have already spoken at length on conviction so won’t repeat it too much here. We just want to highlight the thing that will have an impact on improving your psychology. You may wish to refer back to the previous section on conviction for a refresher.
Suggestions to Help Trading Psychology Problems
Keep a Trading Diary:
Keeping a trading diary or journal will allow you to look back and see the mistakes you were making and then bring them to your conscious mind. This is helpful because very often the mistakes you make in trading (or in the rest of your life) are subconscious (like switching strategies). This also is a track record of how you felt while in your trades and can show many useful insights into how you might go about improving your trading performance.
Join a Community:
This means joining a community of like-minded individuals and other traders who are making money using similar techniques that you are. It should be a place where you can get market information and bounce ideas off other successful traders.
Follow a Professional:
Follow someone who has been a full-time trader for many years and has a successful track record. These types of traders are harder to find but when you find one you can learn a lot of helpful ideas to make your trading better. Just make sure that you don’t fall into the trap of blindly following some self-proclaimed trading guru who only wants your money and doesn’t really care if you are profitable or not.
It’s not enough to just scan the news now and then. If you want to be successful in the long run you must be constantly focussed on what is moving price and how the fundamentals and sentiment are playing out each and every day. The speed of information is incredible these days and you need to make sure that you are not making a trade based on yesterday’s news when today there was something that negated that prior news.
You will need to develop a list of “Go To” sources that are reliable at relaying information in a timely manner.
Do Not Overcomplicate Trading:
Trading should be a simple process that you get better at over time and with experience. If you start adding more and more layers to your trading process you run the risk of overcomplicating the process of trading and causing "Analysis Paralysis". Stick with understanding and following the fundamentals and sentiment while developing technical reasons to trade in line with the prevailing sentiment.
3 Keys to Mastering your Trading Psychology
Psychology has a lot more to do with success in the markets than most traders will give credit. Proper trading psychology can be broken down into 3 key areas in which traders may focus their efforts on improvement.
The 3 Keys to Success in the Markets:
- Focus on One Method.
- Have a Trading Plan.
- Build a Winning Psychology.
In this section, we will look at each of these important areas in more depth. Keep your mind open to possibilities. Understanding these 3 keys is essential to your development as a trader and is absolutely necessary for long-term profitability.
Yes, some of this might sound a little cheesy like a motivational speech but being a cynical, miserable person who thinks the power of positive thinking is a bunch of garbage will definitely not improve your chances of success in the financial markets. However, being positive and proactive will improve your odds if you will only give it a chance. You will find it hard to succeed without mastering each key so learn them well.
Focus on 1 Method
You can focus on any method that you choose. However, focusing on one method, especially for new traders, is a major key to setting yourself up for success. This doesn’t mean that you are limited to trading one strategy for the rest of your life. Rather, the point is to master one method first before adding more to your trading plan.
Fundamentals and the sentiment are the main drivers behind the vast majority of price movements in the Forex market and most other financial markets as well. In Forex, a trader will give himself the best chance of success if he implements a trading method based on Fundamental Analysis and Sentiment Analysis.
Technical Analysis is a very novice and retail way to trade the Forex market if that is the only thing that a trader is using to make trading decisions. If you ask big currency traders at an investment bank or hedge fund what type of Technical Analysis tools they use to help them make trading decisions you will likely get a very confused look on their faces. No trader with billions of dollars to invest looks at a chart covered with Bollinger Bands, Ichimoku, or other indicators to make trade calls. Rather, they listen to what the Central banks are telling them.
Technical Analysis has been made extremely popular because it speaks to traders in absolutes. If this pattern shows up then this is the result, if the moving average crosses this then that will happen, etc. It is a very "if this then that" way of looking at the market. This is in contrast to fundamental and sentiment analysis which are open to interpretation. Retail traders really like “for sure” outcomes but what they typically find out (or maybe they cling to the delusion) is that nothing in trading is as simple as buying a pattern over and over and making money.
This is not to say that Technical Analysis is completely useless; Quite the opposite actually. The key is to use Technical Analysis as a timing tool to enter and sometimes exit trades in line with the overall fundamental and sentiment picture. A mix of 80% fundamentals and sentiment combined with 20% Technical Analysis is a pretty good place to start.
With fundamentals, the importance of any economic indicators lies in what the Central Bank is currently focusing on. Each Central Bank will only focus on one or two things at any given time to guide them on their monetary policy. If, for example, the Central Bank is focusing on inflation and growth then production numbers will have little impact on the movement of the currency but GDP and CPI will have the greatest impact on price.
You don’t need to be an expert on the ins and outs of every single indicator, all you need to know is what the main indicators are and which ones the Central Bank is focused on at that time to make decision on what tools they will use to enact monetary policy. What is the Central Bank worried about or focusing on? All traders should follow the Central Banks lead; never fight them because the trader will always lose!
Have a Trading Plan
Having a trading plan is an essential key to becoming a successful trader in any financial market. Without a trading plan, the trader is flying blind and may fall victim to taking random trades. If a trader does not take the time to formulate a well-thought-out trading plan then it is almost certain that they will fail at the trading and investing game.
Your trading plan is your objective approach to entering, managing, and exiting your trades. The plan’s sole objective should be to take out the emotions from your trading decisions. Use your plan and stick with it until it gives you feedback that something needs to be adjusted.
Your trading plan must have critical elements such as the method you trade, your trading edge, trade management, goals, results tracking, and how you will learn from your trades in order to take your trading to the next level of success. You should also define what success is for you. For most people success is the ability to create their living 100% from trading the markets. That’s a pretty good goal and a completely achievable one.
Your plan should provide an objective measuring stick so that you can manage your trading business objectively and make changes to continuously improve your results. Trading plans don’t have to be complex but they should be flexible enough to change after you gain data from a large pool of trading results.
Remember that a big part of success in any venture in life is to do something consistently over a long period of time. This can be quantified by following a trading plan over a large number of trades.
Build a Winning Psychology
There is a common misconception surrounding traders who have become successful. Many people think that these successful traders have something special about them that they themselves do not. While this can be true in some cases, 99% of the rest of the time it’s absolutely false and misleading.
Winning traders have learned to follow a disciplined plan which has an edge that has given them the conviction to stick to it no matter what the markets or anyone else say or does.
In order to develop a winning psychology you must first understand the general public’s psychology in the markets. Fear (selling) and greed (buying) are what mainly dominate the markets with pit stops filled with ambivalence ( price going sideways).
Greed happens when a trader enters a long position after the market is already up way beyond its average daily range. Fear is why people hold onto losing positions far beyond how much they were willing to lose on the trade in the first place. Like the herd, all seem to sell at the worst possible time right before the selling has finished. Don’t follow the herd to the slaughter. Learn to capitalize on the herd's mistakes.
Based on these comments above we can say that greed buys too late and fear shorts/sells too late. The rational trader with a well-defined plan is selling their long positions into the greedy strength and buying back their shorts near the end of the selling. As traders, it is not our job to pick tops and bottoms. Rather, we look to take out the middle chunk of a move and then move on to find another trade.
Fear has the ability to immobilize many traders. When their trade starts to go against them they start to panic and for many people, panic turns into inaction. What should be done is the trade should be exited without emotion as per your pre-trade plan. You don’t have to like taking a loss but while you are in the heat of battle everything you do must be cold and calculated. If you get out of a trade for a 2% loss and the market continues to move against that position another 10%, you would be happy to take the 2% loss over the 10% loss. Professionals call that a successful trade even though it did not make money.
Keep in mind that most people want to be right. Most people can’t admit when they are wrong until the pain becomes so unbearable that there is absolutely no choice but to exit the position. Usually, it’s the broker forcing the positions closed because there is not enough margin to sustain the losses.
Always remember that the markets will be correct no matter what your opinion is. If your trade is not working out the way you thought it would then you need to get out and look for something else to put your money to work in. You cannot let the emotions of fear and greed immobilize you. Have a plan and stick to it.
General Trading Psychology
The 3 “P”s
- No one wins all the time!
- If you want to improve your results you must make small course corrections through your trading results and feedback.
- Hardships and losses do not equal failure.
- Losses are stepping stones to your success.
- A loss is down payment on your next winning trade!
- Learn to unlock the lessons in your losses and you will unlock the door to success.
- You must learn to crawl before you sprint.
- Get excited about your trading business.
- Feel that you are on your way to becoming a master trader.
- Each trading day is a gift for you to discover something new and potentially profit from.
- Try to believe that the market exists for one reason and one reason alone: To serve you!
- Having controlled enthusiasm is the key.
- Have fun and enjoy the process for when you look back on it when you are a true professional you will be able to see all the things that you thought were a waste of time then that turned out to be the reasons you succeeded.
- Every hardship and loss carries with it a benefit that you must learn on your journey to becoming a true professional trader.
- It is simply not possible for you to fail until you decide that you have failed and given up.
- Think of persistence as being like a cork. If you put a cork in a glass of water it will float. Even if you push it down the cork will keep pushing back at you until it finds a way around your blockade and floats right back to the top. The cork is the most persistent object on earth. No matter what you do, the cork will find a way to get back on top. Be like a cork! If you have to, tape a cork to your trading screen so that whenever you hit a rough patch you will know in your heart of hearts that you are a cork and that this rough patch will too pass because of your unrelenting resolve to succeed. Be a cork!
Productive Approaches to Losses
Remember that no one wins 100% of the time. This means that you will have to learn to accept losses as part of the trading game. These losses will always come in the form of a well thought out stop loss policy that was determined before you ever entered the trade.
If you are holding overnight or over the weekend positions there is always the possibility market may move or gap significantly against your position and cause larger losses than you may have intended. Do you have a catastrophe plan? If not, think about making one because there is nothing worse than losing more money than you intended and not knowing how to handle this larger loss.
Every loss is a step towards your goal of becoming a consistently successful trader. There is something to learn from every loss that you have. Make no doubt about it, the lesson is there. Make it a goal to find at least one lesson from each loss. Did you make a mistake entering or exiting? Did you miss a key news point?
Write out and keep track of all the lessons that you have learned. Study these lessons repeatedly to see if there are any common errors you are making that can be easily fixed. If the errors are a result of your method then you may need to adjust your trading plan to accommodate this new discovery.
Each trade should be completely independent of one another. No prior trades should ever have an effect on the current trade you are in because they have nothing to do with one another.
Never carry any baggage over to your next trade. After a loss, you will need to learn to reset yourself back to zero before you place a new trade. If you have to, give yourself a break and step away from the computer until you are ready to come back fresh.
Having a victim mentality is one of the worst reactions that anyone can have in regard to anything in their life, especially in trading. People who feel that the market is out to get them are extremely weak-minded. This limiting belief is one that always allows for the trader to have someone else to blame for their own shortcomings. In effect, the trader with the victim mentality will never have to admit that they were wrong about any particular trade.
Self-pity has no place in the master trader’s world and does not serve any positive purpose. If you are feeling bad or upset about a trade it would serve you much better to take a break and come back when you are ready to learn from that loss. Remember that your last loss is a down payment on your next win!
Realize that you and only you are responsible for every trade that you take. If you place a trade on the advice of someone else, guess what, you made the ultimate decision to place that trade. You are in complete control of every trade you take and you alone have the power to make your trading decisions. Having a victim mentality will only serve to be self-fulfilling so don’t fall into that trap.
Control Your Emotions
It is very important to make sure you have calibrated your mind for success before you place a trade. Take stock of your emotions and how you are feeling before and during a trade. What is your physiology like? What is your mind focused on? Are the answers to these two questions conducive to good quality trading? Make sure that you are being objective in your trade management.
Control what you can control and let go of the things that you cannot. You have the power within you to control your emotional state while you are trading and should never invite negative feelings into your mind during a trade.
Make sure that you have a plan that is strong enough to answer anything that the market throws at you. Always keep objective while analyzing the sentiment and price information and look to update your trade management should a new catalyst hit the market that is contrary to your trade.
Don’t count the dollars that you are up or down while in a trade. Doing this is one of the quickest routes to confusion and emotional instability during a trade. If you absolutely need to, find a way to hide the blotter that shows your profit and loss of your open positions. This takes away any temptation that you may have. Profit and loss should never be the reason behind your trade management.
The mind is not capable of distinguishing between something that is vividly imagined versus something that happens in the physical world. The mind can only understand the stimulus that is fed to it. The source of that stimulus is not relevant to the mind.
It can be quite beneficial to have a pre-trading day visualization exercise that you do for 10 to 30 minutes right before you begin trading. This can be done right before bed as well. The key is to run over your trading plan for the day in your mind and try to see and feel how you will react to the situations that you will be faced with.
See as much detail in your visualization as you possibly can. See the charts setting up and then running in your direction. See your profit statement at the end of the trading day. Feel the feelings of trading successfully and see yourself as a true master trader.
Make sure that you are organized and focused on the tasks at hand and take stock of your emotions prior to trading.
The Subconscious Mind
To become a professional trader you need to have your subconscious mind engaged in your trading. You can do this by imagining that your conscious mind is the captain of a ship and your subconscious mind is the crew that is taking directions to help steer the ship.
Make requests to your subconscious mind before retiring at night and write those requests down so that your conscious mind can continue to remind your subconscious mind about those requests.
You must work hard and work smart but you will need to take time off to recharge and allow all your hard work to be picked up by your subconscious mind.
Refer to the 4 stages of competence section again and you will be reminded that the highest level of trading mastery comes at the point when your conscious mind no longer is a requirement to have great trading performance. The goal is to become unconsciously competent.
Train your mind to look for reasons to stay in or add to a position that is profitable. Your mind should look for reasons to get out of a trade if it’s not going in your favour.
Your current beliefs are an accumulation of all your past experiences and influences. They are built both directly and indirectly into your mind. They are filters that your mind can perceive in the physical world and can act more like a deletion filter. Your mind makes it so that you will only see what is in alignment with your beliefs so that you can confirm to yourself that they are true and/or you are right.
Your beliefs must be evaluated on how useful they are to your trading success, not if they are right or wrong.
You have the power to change your beliefs. Don’t get stuck in the trap of trying to prove that your beliefs are true or correct. You need to change your beliefs so they are conducive to making money in the markets. What really is your reality? You need to decide and make that choice. Beliefs are something that you can change.
Here are a few beliefs that can empower your trading if you truly believe them:
- Life and the Universe we live in are perfect!
- The markets are my friends and are here to serve me!
- Losing trades are stepping stones to my goals and dreams.
- Everything that happens in the market is perfect and as it should be based on the collective thoughts and actions of all investors at any given time.
- There are no limits to what I can do in the markets.
- My path and journey to trading mastery is one of the greatest experiences in my life.
- I will not fail!!!
The Mind of a Losing Trader
The losing trader thinks that making money trading is easy and therefore doesn’t think any advanced education is a necessary component to becoming successful. The reason that the trader may feel this way is that they may have had many prior successes in business before and believe that trading should be no different. The problem is that these successes likely won’t help you in trading because there are few simple and direct answers to questions in trading. You need to be constantly in tune with the market to be successful and that means analyzing new sentiment-driven information frequently.
Few people give enough respect and treat trading as the business that it is. Most traders drift through the trading day with no particular plan of action. They will tend to chase markets up and down and have no standard set of rules for why they do what they do.
Losing traders usually have no money management rules and as a consequence tend to suffer large emotional swings while they are trading and are nervous most of the time about their profits and losses. They fear the profit will disappear and wind up taking the profit way too early and are too scared to take any losses. A loss will mean that they must admit they are wrong on a particular trade and this is something that their ego doesn’t agree with.
Another problem with losing traders is having too much information or being addicted to trading systems. This can lead to never sticking with one system which is called switching. Switching is where you have a strategy, trade it and it doesn’t really work, ditch it, and then go on to find a new strategy. This process repeats until your library is full of trading courses. Each and every strategy that you were sold on tells you that this is the last strategy you will need and it has everything you need to become successful in the financial markets. You quickly realize that it’s not that simple and move your search to the next surefire thing. This cycle locks you into a constant stream of losing strategy after losing strategy making it impossible to consistently make a profit in the markets.
Switching is a major cause for losing traders having no conviction in their trading methodologies. Conviction is confidence and the best way to build confidence is to succeed at something consistently over a sustained period of time. If you constantly switch systems, you will never gain enough confidence to make it as a trader.
The losing trader typically relies exclusively on Technical Analysis or indicators to make their trading decisions. In the Forex market prices are driven by the fundamentals of countries and the policy action the central banks are taking to grow their economies. If you ask any big city Forex trader what indicators he has on his charts and he might reply something simple such as volume. The professionals do not rely on a bunch of spaghetti on their charts to make decisions. They trade in line with the central banks and get out when something changes fundamentally.
Exclusively using Technical Analysis for coming up with trading ideas is for the retail trader, not the winning professional trader. However, Technical Analysis can have some small use as a timing tool to get into a trade in the direction of the prevailing fundamentals and sentiment.
In the financial markets, traders should never forget that they are competing against other traders, professional and novice, and the only way that you can continuously make money is by being smarter and more disciplined than your competition. You are competing against some of the brightest financial minds in the world and they want your money!
The losing trader quickly loses and returns any recent gains to the market. After a large win, the trader’s standards begin to drop and complacency (greed) takes over thinking that this will always be easy. They get an adrenaline rush from the gain and want to duplicate it and start counting all their gains before they have booked them in the bank as profit.
The losing trader desperately tries to recoup any losses as fear sets in and the money lost is setting off such frustration that the trader needs to erase that loss in his mind and on his trading screen at all costs. They will usually take on bigger positions or more positions, doing whatever they can to quickly erase the loss that just happened. Changing trading standards to allow for more trades will usually end in more losses and decreased trading performance.
Losing traders will stay glued to their screens all day trying to force trade setups that are of lower quality than their trade plan allows for. They spend very little time preparing for a trading day and almost zero time following up on their trading results.
The losing trader always has excuses for why he or she may have lost which are never their own fault.
The Psychology of Money Management
The Basics of Mental Money
The psychology of money management can be an extremely daunting subject. Instead of forcing a master’s degree in psychology on you, it might be better to give you a few of the basic forms of mental issues that traders tend to fall into. After that, we will discuss some steps that you to take to make sure that you do not fall into these same traps.
Focusing on the amount of money being made or lost while in a trade is a trap that leads you down a road filled with stress and anxiety that will eventually lead to failure. Allowing yourself to let a loss go further from your intended stop loss or grabbing at very small profits quickly will only encourage these types of losing habits in future trades. Once you get into these kinds of bad habits they start to warp your thinking on the next trade, then the next trade, and the next...
Before you enter a trade you should have already formed a very good Fundamental Analysis or Sentiment Analysis reason and planned out the entire trade from entry to exit for both stop loss and profit objectives. This allows you to have confidence in that you have a plan that will dictate exactly what to do and how to react no matter what the market throws at you.
Once a trade is entered you should have completely accepted the possibility of the maximum monetary loss that may occur as a result of your well-placed and planned stop loss order. If you cannot accept the maximum loss before you enter the trade then it’s only going to make the situation worse if you get into the trade anyways. If you do find yourself in a situation like this you should decrease your position size or try not taking the trade at all.
If you find that you cannot accept the maximum loss after you get into a position, and it’s not working out the way that you had intended, then it may be wise to cut the position size in half. Doing this should help you focus better but if it doesn’t then it is best to close the position entirely. Remember, you can always get back in.
Every trader will eventually have to accept that losses are and always will be a part of the trading business. However, trading losses should never get out of control and wipe out your account. Every loss a trader takes should be controlled and manageable by having a predefined plan before the trade entry. Always place your stop loss orders at a level that the market should not go to if you are correct about market direction.
The only thing the trader needs to focus on after entering a trade is any changes in the sentiment of the market environment. As new information presents itself you should adjust your bias accordingly. Nothing else should get in the way of your thinking not even what the profit or loss blotter says. All emotion should be removed from trading so that you can remain as focused as you were before you entered the trade. Don’t let what your profit and loss says twist your thinking. Focusing your attention on profit and losses will take away your focus from what’s happening in the market and can lead you down a slippery road to ruin.
You will need to learn how to gain the confidence to follow your well thought out trading plan through discipline and results tracking. After all, the only reason a trader would change the plan in the middle of a trade is that he doubts his plan (or simply doesn’t have one) and lacks the discipline to follow it. However, if the trader had seen results from the trading plan then he would have had more confidence to stick to the plan.
Don’t count the money until you ring the cash register and book your trade. It should not matter how much profit you see while in the trade, the only thing that should matter is what is happening to the market environment in real-time.
If you find yourself staring at the profit and loss blotter instead of monitoring the news flows it might be a good idea for you to minimize or hide the blotter. If you find yourself peeking at it then close it all together and focus your attention on the price action and sentiment.
If you focus your attention on how much money is being made or lost on your screen and thinking about it in terms of rent or car payment you are going to have a hard time focusing on more important things such as managing your position in accordance with your trading plan. You should never be trading with scared money that you can’t afford to lose. This puts a lot of pressure on the trader to perform and if you are a new trader it’s unreasonable for you to think that you can come to trading and instantly start generating a great income from day one.
Counting your money and mentally spending it on whatever you’re thinking about while in the trade will cause you to make irrational trading decisions that are based on things other than what is genuinely important such as price action, real-time news flow and sentiment.
Reasons you May be Thinking about the Money While in a Trade
Trading with "scared dollars" is a major reason people think about money while in a trade. If you are trading with your rent money then that is probably not a very good or safe idea. Your emotions will overrun your rational mind with thoughts of "what if" or "what will I do if I lose this money?" Never trade with money you can’t afford to lose because most traders will lose money while they are learning how to trade.
Many traders think about the money because they lack complete conviction probably because don't understand their trading strategies or trading plan (or they don’t have a plan). This is very common and can lead to many other trading problems that are not habits a trader wants to get into if he wishes to become consistently successful. Without a trading plan, the trader is lost and stacks the odds of success against him.
Many traders fall into the trap of not trusting that they will do the right thing that they know they should be doing. This usually occurs after they have broken their own trading rules or didn't follow their trading plan so many times that it has become a habit. Developing this bad behaviour can be a very costly habit. Examples would be not taking your stop losses because you can’t admit you are wrong or taking your profits way too early out of fear that the market might take back that profit. If you break your rules once it becomes easy to continue breaking your rules so make a plan and stick to it.
Some traders get over-excited and trade too large a position for the size of their account. This really makes them think about the money because they are about to murder their account on one trade if it goes wrong. More importantly, trading too large a position too early in a trading career can be a crippling experience. It doesn’t make sense to go from a default trading size of 1 micro lot to trading 10 standard lots on the next trade. The size of trader’s positions should be increased incrementally over time as more experience and profits build up in the account. Also, the trader should be consistent with how much capital they risk per trade. Lot sizing of a position should be based on how much money you are willing to risk per trade. 1-2% risk per trade is a good general idea.
Do not place a trade out of fear of missing out on the trade. Getting a bad case of FOMO (Fear Of Missing Out) can cost you a lot of money. You will need to gain all the necessary information to make a good trading decision before you place a trade in the markets. Don’t worry about a missed trade because there will always be another trade right around the corner.
Missed money is always better than losing money and not having the appropriate amount of information before placing a trade is a surefire way to lose money. Each trader will need to gain control over these types of impulse trades. They cost you commissions, potential capital losses and create bad habits that are hard to get rid of.
Don’t sell your position out of fear that prices will move against you and you might lose out on one penny of profit. If you want to take a larger gain you will have to sit in pullbacks against your positions while the market corrects and prepares for its next move. Concentrate on understanding the forces of supply and demand taking place in the market in real-time. Always have at least two scenarios of what might happen while you are in the trade, no matter how bullish or bearish you might be. This will keep you open to possibilities of profit or loss in any position. Remember that anything can and will happen in these volatile markets that we find ourselves in today.
There are no guarantees in the markets or in trading. It would be a benefit to any trader to consider other possibilities other than what the chart suggests. Patterns fail all the time and you need to be prepared when they do fail to save your capital and potentially profit from the failed pattern itself. This is why monitoring real-time news feeds are so essential to stay in tune with the market sentiment.