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Posts Tagged ‘trading psychology’

Forex training - price action

The market mindset trap:

The Forex market can be a very dangerous place for those not operating from the proper mindset. Since trading is almost entirely psychological, how you think about the market is the most important factor in determining your long-term trading success. To succeed in the forex market an objective mindset is required. While many traders start out with an objective mindset towards the market, few can maintain this way of thinking.

The difficulty in maintaining an objective market mindset lies in the fact that you can do a large amount of damage to your trading account extremely quickly in the forex market. Traders have access to an enormous amount of leverage in the foreign exchange market and leverage is extremely dangerous to someone who is trading from the wrong market mindset. So how can a foreign exchange trader achieve and maintain an objective mindset in the ever changing and volatile arena of forex trading?

The correct market mindset stems from not trading money that you can’t afford to lose. You should not be using money to trade with that you could possibly need to live on or that anyone else in your family might need. This is the first step in operating from an objective point of view in the market. Not needing the money in your trading account allows you to develop virtually no emotional attachment to anyone trade you enter, this is very important if you want to consistently make profits in the foreign exchange currency market.

Only after we have confirmed that we are not using money we need for any day to day expenses should we move on to the next most important factor in achieving and maintaining the proper market mindset; a truly profitable and easily definable trading methodology. We need an edge in the market, a definable and profitable edge is important because we need it to base our trading plan off of. Money management is just as important, if not more, than your profitable edge. However, you first need to define your trading method before you can develop a money management plan.

Planning your money management scheme is the next step after you know what your definable trading edge in the forex market is. You need sit down and map out how much you are able to risk each time your edge appears in the market. Many traders cannot maintain an objective mindset while risking more than 2% on any one trade. This of course is only a general rule and mostly depends on the frequency of your trading, if you only trade once a month than you might be able to operate objectively by risking 5% per your once a month trade. However, if you are trading once a week or more than generally speaking 2% is the max you should have at risk per trade if you want to give yourself a realistic shot at not trading based on emotion.

I can recommend a very good trading method that will provide you with solid strategies for finding a truly consistent edge in the forex market. The best method I have found for trading the foreign currency market is price action analysis. After discovering and implementing specific price action setups into my trading I was able to easily map out my money management technique. This allowed me the ability to remain calm and confident during every trade; thus achieving an objective market mindset. There are many ways to profit in the market, which ever way you do it though one thing is for sure; you need to think objectively about all of your market related activities.

To have successful trading; is 80% psychological and 20% methodological. That is why; self-knowledge and study of its own patterns of behavior is the key to success.

We all know that the forex market is highly volatile and often decisions must be taken in very short periods of time. Uncertainties are on all things, and even today we have the help of many tools and techniques, no one really knows what will happen with the market prices. Faced with a downward transaction, no one knows exactly how low will prices fall or how high they will rise, the question is how much will I risk. All this creates great anxiety and nervousness in forex operators, which often end up losing their money by making hasty decisions.

Control over your emotions and stress management

Given that everyone has access to the same information, the same news, the same numbers, indicators, statistics, etc… What is the difference between winning and losing traders? The answer is that the former remain emotionally stable at all times.  They can handle the pressure of risk and can control their emotions. They also understand that losing is part of the business. Trust in its methods and systems, giving them the peace of mind that losses are only small setbacks that will last a certain time and then be recovered.

Enter calmly and with confidence knowing that everything will turn out right, is the most important thing. Planning in advance our strategies to operate in forex will give us greater sense of security.

Controlling your emotions can be achieved through: Trust in the probabilistic model, to be psychologically prepared to lose, to operate without fear and self-criticism. We must not be satisfied with the way we trade, but we must investigate our errors and design techniques to overcome them. Keeping a log of errors is quite useful to shed bad habits and avoid falling back into them. All this as a whole guide will provide greater security and peace of mind in difficult times.

The question among the rookie traders is: When are you ready? That is, when it becomes aware of what they learned and the sense of one’s own emotions into effect, and when you have enough knowledge (of both the market and ourselves). That is, when there is awareness of one’s own inner states, resources and intuitions, and when you make a correct assessment of your own strengths and weaknesses as Traders. Confidence in oneself, valuing our skills and emotions is the conclusion of this article.

Emotional power are required:

A-Self-control: keeping disruptive emotions under surveillance such as extreme fear or feeling of absolute immunity and the impulses that do not meet your trading plan.
B-Trust: maintaining adequate standards of honesty and intellectual integrity, based on a proper training and the predetermination of the actions to be taken in situations of gain or loss.
C-Consciousness: assume the responsibilities of business, and the fate of its operations.
D-Adaptability: flexibility to accept changes in the market and positions.
E-Innovations: accept the new information or new perspectives, expectations, or ideas that are better suited to new situations
So handling stress, taking regular breaks will help fight it. In difficult times it is advisable to change rooms, and renew energy, preferably outdoors. The practice of respiratory exercises is also highly effective, helping to lower the decibels and think clearly again. Accepting one owns limitations also help ease the tension. Pressed with ambitious goals to take profits and limiting ones capacity only generate more frustration, which markedly reduces productivity.

Discipline

In forex, every-trader will be solely responsible for their own decisions and actions and must face the consequences. Great discipline and ability of acceptance is necessary in each trader. Self- knowledge is as important as the knowledge of facts, economic theories, news and methods. For it is not strange to see how many times the emotions prevail, forgetting any tools, and indicators. People who have self-control and discipline over their emotions will emerge as winners.

It is not easy but necessary to make a self-analysis to identify our strengths, weaknesses and personal tendencies because by nature, our perspective is subjective. To achieve this requires willingness to be completely honest with ourselves and accept the results of looking inside ourselves. Admitting our mistakes is very beneficial both in trading and in life itself, and will enable us to understand why we lost and how to avoid that situation next time. It is possible to ignore weaknesses and work on them, as it is possible to review and work on our trading methods.

Within the discipline is the habit of information. A professional trader should be used to checking market information on a regular basis (reading news, subscribing to newsletters and alerts, checking indicators, etc.)… This will give you the confidence to operate on the basis of accurate and objective information, which along with the strategy put forward to avoid falling into despair and impulsive actions that could lead to their losses.

Discipline involves:

– Training. Each trader should draw and follow a training plan that would provide all the required expertise
– Self-analysis. Perform a thorough analysis of our own strengths and weaknesses, to exploit the work of our strengths and work on our weaknesses
– Planning. Create a business plan, including strategies and trading methods
– Objectives. Achievable and measurable targets. Check frequently and compare with results, analyzing the reasons of differences among both.
– Information. Check market information and indicators each period.
– Self-control. Each trader should practice stress management techniques and emotions. Self-recognition of one’s own emotions.

Fear and greed: Two sides of a coin

Both can give us losses even if the reasons are different.

FEAR: usually when there are down trending markets there is fear and traders can be carried away by despair. To close all positions to avoid further losses is our impulse response to the market. Important is to notice that these movements are mostly market peaks that eventually reverse. The trader that acts calmly and beforehand verifies indicators and trends is more likely to take advantage of changes in the market and avoid losses. That’s why the best in these cases is to set a “stop loss” and respect it, because in “difficult” times you will not be thinking with total objectivity and reasoning.

GREED: This is contrary to the case of fear. Greed occurs when the gains are increased and the operator fails to distinguish a time when to get out of a position, always waiting to “get something closer to the market.” Of course this also has its peak before starting to fall, which in the best case scenario achieves minor gains and at worst … could even lose money.

To avoid falling prey to these emotions, the important thing here is to understand that both parameters, Stop Loss and Limit to be set before each transaction based on the fundamental and technical analysis of it, and then they must be RESPECTED.

Remember:
• Stop Loss: how much am I willing to lose.
• Limit: The limit of my earnings.

In short, the desirable attributes in the profile of a successful forex trader are:

-Auto-control (managing emotions and stress)
-Discipline (a plan and follow it, observe the strategies raised)
– Self-confidence (comes from; market knowledge and self of our strengths and weaknesses)
-Ability to accept (being psychologically prepared to take risks and accept losses)
– Tenacity and perseverance (forex is a long term market; you must learn to be patient and wait and persist in getting to your profit points.  Also you must not get discouraged at the first signs of price reversals.
– Ability to adapt (keeps an open mind and be receptive to new ideas and changes in the market)
-Self-criticism (to learn from our mistakes)
-Tolerance to pressure
– Perception and common sense (detect market opportunities and distinguish those highly profitable and meet the expectations of what the market could do next)
– Selective Mind (ability to separate the forex market forecasts in general, the current positions of the market, not to think about the market from the perspective of an open position).

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First and foremost, you need to realize that only a small percentage of traders are successful at developing an trading psychology and the only reason for them being successful, is because they have learnt how to deal with the aspect of failure.

Developing a trading plan is of fundamental importance as far as trading is concerned. What’s of even greater importance though is that you the trader, manages to convince yourself 100% of the importance of a trading plan. Unless you believe your trading success rests solely on a trading plan, you’ll simply not be willing to invest enough time to develop one.

Likewise, I also emphasize the importance of separating oneself from the larger majority. In other words, one needs to find a trading edge. Remember, the vast majority who decide to trade will end up failing and unless you have an edge, you’ll end up joining them.

You’ve more that likely heard and read that on average; only 20% of people entering the markets are successful and actually make money from trading business. So, when you here me making references to the majority, it’s the group of 80% that I’m referring to.

So, where do these figures come from and how can we be so sure that only 20% of traders make money? I know I don’t have any evidence to back such a statement. In fact, when I first considered it, I was of the opinion that it’s no more than a popular cliche.

Frankly, I can see how such a statement could be backed by evidence unless of course there are accurate audits and precise statistical data.

I’ve spent a considerable amount of time mulling over these figures so it came as a welcome surprise when I became involved in a discussion with someone else who also doubted the accuracy of them.

Interestingly enough, we both agreed that as with other professions, traders fall into one of three categories. On one end of the scale you have the top 20% who are highly successful while on the other end of the scale; you have 20% who fail completely. This in turn leaves us with 60% of traders in between, and this is the group who don’t really fail, but they also don’t make any noticeable achievements either. So, now we can see how the 80% group is made up.

Clearly, the largest percentage of traders falls within the 60% group where they just tend to go with the flow. What is it then that drives others further, thus allowing them to enter the top 20% group?

Given what I do for a living, I firmly believe that most people fear failure to such an extent, that they’re in turn reluctant to take risks. I also believe that far too many people perceive failure to be an entirely negative experience when in fact it need not be.

Years ago when I first started with a trading education, an instructor once said that I should never see failure as failure, but instead, we should rather see failure as an opportunity to improve ourselves. Let’s face it, when you experience failure in a certain area, you’ll be particularly vigilant the next time round in order to avoid making the same errors.

An ideal attitude towards failure can be seen in the likes of Thomas Edison who himself experienced many failures along the road to success. Interestingly enough, Thomas once said that instead of failing, he’s simply discovered thousands of ways which don’t work.

Having come to the conclusion that so many people fear failure, Thomas Edison later added that a large percentage will give up, without actually realizing just how close they are to success.

Of course no trader should be willing to storm ahead blindly but there’s a fine line between caution and the fear of failing. I often have to remind myself that I only live once, in order to give myself that extra bit of encouragement for taking a risk. Of course, I then have to do whatever is necessary in order to prevent myself from worrying about my decision.

If this article leaves you with just one thing, I hope it will encourage you to cast off those shackles which keep you restricted to the middle 60% group. While I certainly don’t advocate throwing caution to the wind, please don’t allow yourself to be intimidated by a fear of failing. Take some risks and face your fears, and you’ll be much more likely to get into the top 20%.

trading profits

 

The tip of all tips is, trading and investing are two very different things. Another tip in this regard is, don’t fall into any trading psychology traps which follow this line of thought.

 

Because so many people first learn trading through various investments channels such as the stock market, they incorrectly associate the two together.

 

The similarity between investing and trading lies in the fact that both require you to risk your money in anticipation of attractive returns.

 

Trading and gambling share numerous parallels, hence the reason they are often compared to each other. These similarities include:

 

• Both can be exhilarating and full of action

• Both can move incredibly quick

• Much is left to chance

• Both have uncertainties such as market trends, weather, political influences, deck of cards, dice and other players

• High risk opportunities

• Distorted judgment caused primarily through lack of emotional control

• A strong desire to beat the house or to beat the markets

• There’s a wager with every transaction

• Most people loose most of their money

 

Is trading really wagering?

 

In one of the older Eddie Murphy movies called “Trading Places”, Eddie Murphy passed a remark, “You’re bookies” when the owners of a commodities brokerage explained how the markets work.

 

Trading is not the stock market and rather that entering into investments, you’re entering into a betting game. Essentially, you’re placing your bets with regards to how you think the markets will behave.

 

Unlike with gambling though, where you’re simply stuck with any bad bets you place, one can more often than not get out of a bad trade simply by trading again. No matter how insane a deal may be, you’ll nearly always find somebody who’s willing to take a chance, being in search of that magical payout. Of course it should be said, it’s mostly newbies that fall prey to such traps.

 

While you can often get out of a bad trade, this is not necessarily a rule of thumb, particularly in a thinly traded market.

 

Let’s face it, anyone can place trades but the real test comes when it’s time for you to be in control of yourself and to keep sticking with your system.

 

Each time you place a trade, it’s much like being in a room full of gamblers. However, because there’s so much hype surrounding trading, most people never see the real true nature of the game.

 

If you’d never gambled before, would you give up everything in order to earn a living with it? Probably not and yet so many believe they can earn a living by trading, even when they have no experience. Unfortunately though, that’s not how it works.

 

Not all gamblers are professional gamblers and not all traders are professional traders. In fact, a large percentage of them are simply trying their luck.

 

According to the dictionaries, gambling can be defined as:

 

1. An act or undertaking which has an uncertain outcome

2. To expose oneself to risk or hazards

3. To become engaged in hazardous or reckless behaviour

 

Okay, now let’s take a look at the definitions of “calculated”

 

1. Determined by mathematical calculation

2. Undertaken after careful estimation of the likely outcome

3. Made to accomplish a certain purpose; deliberate

 

Now let’s see the definitions of “risk:

 

1. The possibility of suffering harm or loss; danger.

2. A course of action involving uncertain danger.

3. The variability of returns from an investment.

4. The chance of nonpayment of a debt.

 

If you want to be a “real” trader, then you’ll need to abide by your rules and you’ll need to stick with your system. Take risks by all means but be sure they are calculated risks and make sure you watch them diligently.

 

Unlike gambling where the outcome of bets is uncertain, for the most part, the outcome of trades is certain, at least for the professionals. These are people who follow their system and who only take calculated risks, knowing all too well that if they enter into a trade without having done the proper preparation, the odds will be stacked against them.

 

The vast majority of gamblers are impulsive which in turn amounts to them acting spontaneously rather than taking calculated risks. Furthermore, the very rarely manage their finances effectively, just as they usually tend to play outside the rules.

 

Lastly, don’t be tempted to act irresponsibly in the search of a cheap thrill as is the case with gamblers. Instead, focus on reality, take calculated risks, and aim for a month on month trading profits.