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 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
Let’s look at each of these important areas in little more depth. Keep your mind open to possibilities. Understanding that these 3 keys are essential to your development as a trader is absolutely necessary. Yeah, some of this might sound a little cheesy or 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 forex market. But, being positive and proactive will improve your odds if you only give it a chance. You will find it hard to succeed without mastering each key so learn them well.
- Focus on one Method
You can focus on any method that you choose. However, focusing on one method, especially for new traders, is key to setting yourself up for success. This doesn’t mean that you are limited to trade 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 sentiment is the main driver behind the vast majority of price movements in the forex market. In forex, a trader will give himself the best chance of success if he implements a trading method based on the fundamentals and sentiment.
Technical analysis is a very novice and retail way to trade the forex markets. If you ask big currency traders at banks and funds what type of technical analysis they use to help them make trading decisions you will likely get a very confused look on the traders face. No trader with billions of dollars to invest looks at a chart covered with moving averages and 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 in absolutes. If this pattern shows up then this is the result, if the moving average crosses this then that will happen, etc. Whereas fundamentals are open to interpretation. Retail traders really like “for sure” outcomes but what they typically find out (or maybe they cling to the delusion for ever) is that nothing in trading is as simple as buy a patter and make 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 in any economic indicators lies in what the Central Bank is focusing on. Each Central Bank will only focus on one or two things at any given time. 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 a great impact. Forex factory has a great economic calendar that is free and gives you a good rundown on what each economic indicator means. http://www.forexfactory.com/calendar.php
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 that 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 forex trader. 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 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 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 into 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 that has given them the conviction to stick to it no matter what the markets or anyone else says 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 is what a trader will enter a long position after the market is already up way beyond its average daily range. Fear is why people hold onto losing positions too far beyond how much they were willing to lose on the trade that. 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 herds 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 near 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 middles chunk of a move 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 lost 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 it continues to move against that position another 10%, you would be happy to take the 2% loss over the 10% hit.
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 are no more margins to sustain the losses.
Always remember that the markets will be correct no matter what your opinion is. If your trade is not working 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 immobilizes you. Have a plan and stick to it.
The 3 “P”s
- No one wins all the time!
- If you want to improve your results you must make small course corrections through you 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.
- 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 being 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 placed the trade.
If you are holding overnight 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 you 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 than you may need to adjust your trading plan to accommodate this new discovery.
Each trade should be completely independent from 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. You will need to learn to reset yourself 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 regards 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 short comings. 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 objectively analysing the sentiment and price information and 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 have 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 reasoning 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 stimulus that is fed to it. The source of that stimulus is not relevant to the mind.
It can be quite beneficial to having 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 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 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 favor.
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 simply 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!!!
So despite the minefields out there, remember you are less than 100 trades away from truly unlocking the attractive bonuses and the trading role with your name all over it.
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